Preparing for Your Car Loan

How well you handle your car loan will primarily depend on how well you prepare for it. Here are the things all borrowers need to do before applying for car loans.

• Budget. You don't want to find out once you've purchased your new car that you can't afford the payments. To avoid financial hot water, budget before you even begin looking for car loans or a new vehicle. Total your expenses and income to verify that you have enough room in your budget to add a car payment. Try to keep your debt below 15% of your net income if possible.
• Save. Although buying a car with little or no down payment is possible, it's an unwise decision. If you can, hold off on buying a new vehicle until you have at least 20% of the purchase price saved in cash. With a 20% down payment, your car loan will be smaller, which means less of a monthly payment burden and lower overall interest costs.

• Order copies of your credit reports. The interest rates of car loans are largely determined by borrowers' credit scores, and credit scores are determined from the information contained in credit reports. For this reason, you should order your credit report from all three major credit bureaus before applying for a loan. Review the information on your reports to make sure it is accurate and current. Also look for items that may be harming your credit score, such as overdue payments or excessively high balances, that you might be able to fix.
• Order your credit score. Your credit report won't contain your credit score; you must pay a fee to view your credit score. You can order your credit score on any of the credit bureau websites. Knowing your credit score will help you research car loan interest rates for people in your credit tier.
• Research interest rates. In order to determine the car loans with the best interest rates, you will first have to research market interest rates for borrowers with your credit score. Use an online calculator to help you estimate your interest rate. You can also research interest rates by comparing offers on auto loans from several different lenders.
• Know the terms of your car loan. The terms of your car loan are just as important as the rates. For example, some car loans charge prepayment penalties, which are fees the borrower must pay if he/she pays off the loan early. Try to avoid auto loans with early-payment penalties so you have the option of paying the loan off as soon as you can.