For a successful auto purchase, you've got to get several things right: choose the right car, get a good price, and fund the purchase in the most affordable way. If you're going to borrow for your auto purchase, it pays to know how to get a great auto loan.
Start thinking about your auto loan even before you start looking at cars. When you do some research ahead of time, you'll improve your chances of getting a loan (and a car) that fits with your lifestyle. Plus, when it's time to make a deal, you'll be ready -- and you'll be on the road that much more quickly.
Key to a Great Auto Loan #1: Manage Your Credit
One of the first things you should do before applying for an auto loan is review your credit. All US consumers are entitled to a free credit report under federal law, so exercise your rights. Make sure that your credit looks as good as it possibly can -- it will affect the interest rate you get, and therefore your monthly payments. Find out if there’s anything on your reports that needs fixing. Any errors or negative information can keep you from getting the car you want.
Key to a Great Auto Loan #2: Know How Much You Can Spend
Diligent budgeters already know this, but most people don't put enough thought into it before it's too late. Get a clear idea of how much you can spend (down payment and monthly payments) before you start looking at cars. If you fall in love with a vehicle before you know whether or not it's in your budget, some salespeople can make it appear as if the car is affordable with fancy math and long term loans. In reality, you'll end up with a loan that costs too much and that you'll be stuck with for years.
Key to a Great Auto Loan #3: Look at the Big Picture
The terms of your auto loan will determine how much you pay now and how much the auto loan costs overall. Remember that a low cost now may not mean low total costs for you in the big picture.
For example, most borrowers choose a low down payment because it’s easy to manage today. However, that choice increases the total cost of your auto loan and usually leaves you ‘upside-down’ (meaning you owe more on the vehicle than it’s worth) for years to come.
Figure out exactly what your loan will look like -- month by month -- by running your loan details through a loan amortization calculator. You'll learn how much you're spending on interest and how much you'll still owe on any given date in the future.
Key to a Great Auto Loan #4: Consider Insurance
When you ask various lenders what they’ll offer you, you may find that you need insurance to get the best auto loans. I’m referring to disability insurance and life insurance at this point. The lender is concerned that something could happen to you and you won’t be able to pay them back.
Having insurance might not be a requirement, but it might be helpful to have the details of any coverage you have available. Even knowing that you have coverage (even if you don't know how much) can be helpful in moving your purchase along.
Key to a Great Auto Loan #5: Shop Around
This is simple but it is often overlooked. The most important point here is that you don’t have to get your auto loan from the dealership. Check with a credit union, bank, online lender, or P2P lending source. In most cases your car dealer won’t have the best auto loan (but in some cases the dealer's offer can't be beat). By consulting with an alternate lender before stepping onto the lot, you’ll be armed with knowledge of what’s available to you -- and that gives you bargaining power.
Key to a Great Auto Loan #6: Avoid Prepayment Penalties
Things change in life and flexibility is important. Your auto loan should also be flexible. Find a lender that will allow you to make extra payments or pay off the loan entirely without any penalties. It’s important to read the fine print – some penalties aren’t called “penalties”.