How to Prepare for and Shop for an Auto Loan

Picking out the car is the fun part of the car buying process. The loan, on the other hand, isn’t so much fun. You’ll be stuck with the loan for four or five years, so make sure you shop carefully. Just like you don’t want to end up driving a lemon for the next several years, you also don’t want to be saddled with a bad loan at the same time.

Check your credit first. Before you apply for any major loan, it’s wise to check your credit report and credit score. This gives you a chance to clear up any delinquencies or inaccuracies on your credit record. It also gives you an idea of whether you could easily qualify for a loan or whether your credit needs improvement.

Save up a down payment. Depending on the loan terms you’re looking for and the state of your credit, you may be able to qualify for a loan without a down payment. However, you can lower the amount of your loan and therefore your monthly payment if you pay some money toward your vehicle upfront.

If your credit score is in the 600s or lower, you may have to make a down payment of 10% to 15%. On the upside, the down payment could lower your monthly payment by $50 or more.

Check the national and state loan averages. Average auto loan interest rates change often. You can check the averages through a site like Bankrate.com or with your local bank or credit union. Knowing the current average interest rates helps you know whether you're getting a good deal.

Your credit rating and down payment will typically dictate what type of interest rate you get. If you have a low credit score, generally less than 720, your interest rate will probably be higher than the average. On the other hand, you qualify for a lower-than-average interest rate if you have an excellent credit score.

Review your budget so you know what payment you can afford. The bank may approve you for a larger car loan than you can actually handle. Before you go shopping, take a look at your current expenses to see what you have left over for a car note. Don’t forget to factor in insurance, especially if your current insurance policy is liability only or it’s for a lower-valued vehicle. Let your bank the monthly payment you can afford and ask what loan amount would fit that monthly payment.

Get preapproved through a bank or credit union. That way, you can better shop for a car that fits your budget. There's no use looking at cars in the $30K price range if your maximum loan amount is only for $25K.

Try to do your loan shopping within a 14-day window. Loan inquiries affect your credit score, but if you’re rate shopping, the credit scoring calculation ignores inquiries made within a certain timeframe (14 to 45 days depending on the credit scoring model). Once that window closes, the inquiries remain on your credit report, but the credit scoring calculation treats them as one inquiry.

Only accept a loan that you can afford now. Don’t assume that you can improve your credit score and qualify for a refinance in a few years. There’s a chance your credit may not improve. Or, the refinance rate may be higher than the rate you’re already paying.

If you buy a car you can’t afford, you may struggle financially. Miss too many car payments and not only will your credit be ruined, your vehicle may also be repossessed. Spend a few months repairing your credit if it can help you qualify for a better rate. It may not be what you want right now, but it’ll save you money in the long run.