The financial decisions you make in the months leading up to your car purchase will play a big role in whether you’re approved for an auto loan and the interest rate you pay. Making the right money moves is key to a smooth car purchase.
Keep only the credit cards you have.
Opening new credit cards can hurt your credit score in two ways: by adding additional inquiries to your credit report and lowering your average credit age. Avoid opening new credit card accounts in the months leading up to your car purchase to protect your credit score.
Avoid taking on new debt.
Not only should you steer away from credit cards, you should avoid taking on debt in general. That means no new loans and no large credit card purchases. Additional debt raises your debt-to-income ratio and lowers what the lender believes you can afford to pay on a monthly car loan.
Pay off past due accounts and collections.
If you find a lender who will approve you with past due accounts or collections, but your loan will likely have a higher interest rate and higher monthly payments. Paying off delinquent accounts improves your chances of getting approved for favorable loan terms.
Check your credit report and credit score.
Your credit report and score will play a major role in your auto loan. Check your credit report to get an idea of where your credit stands – it’s the number the lenders will use to approve you and set the terms of your loan.
Your credit report holds the information that affects your credit score. Review your credit report to make sure it’s accurate and to spot any negative information that could get your loan application denied.
Save money towards a down payment.
You may be able to drive off in your new car without making a down payment, but that may not be the best move. Making a down payment can keep you from being upside down in your car loan – a situation where the balance on your loan is more than your car is worth. The down payment also puts you closer to fully owning your car and can lower your monthly car payments.
Put money in your emergency fund.
Having a lump sum of savings set aside can come in handy if you have major car repairs that aren’t covered by your warranty or you have to pay a car insurance deductible. Or, in the case of job loss or other major financial strain, your emergency fund can help you stay current on your car loan and other monthly payments.
Seek your own financing.
Getting financing from a bank or credit union before you go car shopping gives you have more control of the buying decision. With a loan pre-approval, you know exactly how much you can afford and can shop for vehicles in that price range.
Decide what you’ll do with your current vehicle.
You generally have three options for your current vehicle: sell, trade, or keep it. Consider the advantages and disadvantages to each to make the best decision.