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Tips for shopping for an auto loan

If you’re ready to make the leap and apply for an auto loan, follow these steps to make the right decision:

Prep your credit

Buying a new vehicle shouldn’t be rushed. As you start researching your dream vehicle, it’s time to also make sure your credit is in tip-top shape.

First, get copies of your credit report from all three major U.S. credit bureaus: Equifax, Experian and TransUnion for free from annualcreditreport.com. If you find any mistakes on the report, contact the bureau that provided it and file a dispute.

Don’t apply for any other new credit in the days and weeks before you apply for a car loan. You don’t want to risk lowering your credit score because it could mean paying higher interest rates.

Consider third-party financing

If you are buying a new or certified pre-owned vehicle from a dealer, it may be tempting to obtain an auto loan through the car dealer. After all, dealers entice you to apply for financing immediately with promises that you can “sign and drive,” without additional trips to a bank or more paperwork to file.

But unless you have excellent credit and qualify for 0% financing through the dealer, it’s wise to explore your auto loan options.

Smart borrowers will instead look at banks or credit unions to get financing. Banks reported $368 billion in open car loans in 2017, ahead of credit unions ($313 billion), and dealers, otherwise known as “captive auto companies” ($259 billion).

Know how much you can afford

While you want to negotiate with the car dealer based on the sticker price of the vehicle, it’s important to know how much of a car payment you can actually afford before you apply for an auto loan.

Factors like the interest rate you qualify for, the length of the loan, your down payment and even the amount you’ll get for trading in an older vehicle can all affect your monthly payment.

Our auto loan calculator can help you determine how much you’ll pay out of pocket and your monthly payments before you apply for an auto loan so you’ll know what to expect.

Make your auto loan payments and watch your score rise

In sum, don’t be upset if your FICO score takes a hit after you close on your auto loan. Make your payments on time every month and you could see your score reach new heights. In the meantime, enjoy your new ride.

What do you think?

Written by Patrick Mason

Patrick Mason is an exceptional writer specializing in personal finance, homeownership and the mortgage industry. He has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.

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