The Complete Guide to Getting a Car Loan

Will you be buying a car soon? There's more to the process than just selecting the right vehicle. Quality, reliability and cost of ownership are important. But once you've settled on the car, you'll need to navigate the often harried process of financing the purchase. With your budget in hand, here's a complete guide to getting a car loan.

Things to Know Before You Buy

The most important thing you need to do before you try to secure an auto loan is to get an accurate credit report. You can negotiate a fair loan only if you have the right knowledge, so knowing your score as well as the going interest rates are an important part of the process.

While interest rates can vary with the season – for example, dealers commonly offer 0% rates in the summer months – you can go into the deal knowing what to expect in terms of a fair interest rate.

According to data from Edmunds.com (shown below), the percentage of shoppers securing loans in various APR ranges can change dramatically from month to month. Their analysts tracked the percentage of car shoppers securing loans in February 2016 and found the results below.

February 2016 Sales by APR

APR Range

Share of Finance Sales

0%

7.15%

0.01-0.99%

3.16%

1-1.99%

12.20%

2-2.99%

17.32%

3-3.99%

16.77%

4-4.99%

12.36%

5-5.99%

7.23%

6-6.99%

4.76%

7-7.99%

3.03%

8-8.99%

2.42%

9-9.99%

2.19%

10%+

11.42%

You should also determine the length of the loan you want. Keep in mind that if you finance the car over a longer period of time, you'll pay more interest – both in terms of the rate itself and the finance charges over time.

Steps to Take When Your Credit Score Isn't Excellent

If you have less-than-excellent credit, you should take certain steps to try to get the best rate possible on your car loan. Executive Director of Corporate Communications at Edmunds.com Jeannine Fallon recommends "shopping for a less expensive used car and putting at least $1,000 or 10% down at the time of purchase."

Be prepared to also provide the necessary paperwork when taking out the loan. Lenders will want to see recent pay stubs, a W-2 or 1099 as proof of income, a utility bill, rental agreement or mortgage statement as proof of residency, and maybe even personal references.

Getting the Best Deal on Your Car Loan

For many car buyers, a 60-month loan is ideal. But less is better. That's because if you trade the car in later, a dealership will likely give you more money for a car that's only four years old, as opposed to a vehicle that's older. "At the younger age, the car is a great candidate for the certified pre-owned (CPO) process," says Fallon. "That means the dealer will have a more valuable car to sell," which is a benefit to you, the seller, too.

It's also important that you do the math before agreeing to the loan. A new car will require a larger loan, while an older vehicle won't need as big of a loan. Even though interest rates are a bit higher for a used car, there will be less to finance and the payments will be lower because these types of cars cost less overall.

Know What Factors Increase Cost

As a rule of thumb, the more you know about car loans going into the negotiation, the better off you'll be. That includes becoming familiar with these risks:

  • If you have bad credit, expect to pay a higher interest rate.
  • Avoid overpaying by familiarizing yourself with current interest rates. If you don't, you'll be at risk for overpaying – even if you have good credit.

Securing the best deal often involves knowing which dealer incentives are best. For example, sometimes dealers offer the choice between discounted financing (like zero percent) or a rebate. "Many consumers erroneously assume that a zero-percent loan delivers the most savings," says Fallon. "Sometimes, it's better to take the cash rebate and apply it against the purchase of the vehicle – and then use your own preapproved car loan to finance the car."

Should You Get Pre-Approved?

In most cases, walking into the dealership with a pre-approved interest rate almost always helps you save money. The dealer is often able to beat the rate that a bank or credit union will have provided – so you'll be in a position to negotiate rates. "With pre-approved credit, you'll be able to enter into the transaction as a 'cash buyer,'" says Fallon. "From this position, you can negotiate the price of the car – not the monthly payment, which can be confusing."

Financing a car can be a complicated process and can make the experience of buying a car more confusing and stressful. It doesn't have to be that way, though. You can enjoy the process and end up with a car that's right for you and which you were able to purchase at the right price.

Don't allow yourself to be overwhelmed by the numbers. Instead, do your due diligence and know the going interest rates. Get your credit score up and be prepared to put money down. Don't go with the first interest rate you're offered. Take the time to get pre-approved and come into the transaction from a position of power. Finally, go with the shortest length of the loan that you can, and you'll save money in the long run.

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