If you are looking for a new or used car but don't have the cash to pay for one, you will need to secure a car loan to finance your purchase. Shopping for a way to finance your car loan is almost as complicated as choosing the right car, so it is important that you shore up your credit and do some car-loan research before hitting any lots.
Poor credit makes it hard to get a car loan and at the very least can inflate the interest rate on your car loan should you be awarded one. Before considering purchasing a car, check your credit score with any of the three popular credit score companies (TransUnion, Experian or Equifax) and ensure that your score is relatively decent---600 or above. Keep in mind that the lower your credit score, the higher your interest rate will be. It may not seem like much at first, but it can make a significant impact on your monthly payment.
Based on your credit score, work on closing your revolving credit cards and clearing notifications of late payments. It can take up to six months or more to fix your credit score so that you can acquire a car loan at a reasonable interest rate.
While it is good to have an idea of the car you want to purchase before applying for a loan, try to avoid car lots and pushy salesmen. Do your car searching online first and print out some examples of cars in your budget.
Apply for a car loan at banking institutions in your area---especially your personal banking institution---first so that you can comparison-shop interest rates, loan amounts and payoff periods (24, 48 or 64 months). This will ensure that you get the best car loan possible that fits your budget and payment schedule. Have at least 5 percent to 10 percent cash to put down on your car loan in order to secure the lowest interest rate possible, and make sure to set aside some extra money for insurance and tax and title, if necessary. If your loan is approved, your bank will provide you with a pre-approval letter (or check) that is good for 30 days.
Getting pre-approved enables you to secure your funds first so that you can shop and test-drive cars without worrying about the financing.
Car lots offer their own loan service, which amounts to the same as a bank loan except that the car lot works the loan for you. While this can be convenient for anyone who needs a car fast, it can result in you getting a very bad loan with an inflated, marked-up interest rate. Securing a car loan from a car lot can also distract you from careful car shopping.
