Financial Steps to Take Before Buying a Car

March 25, 2017

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Here are a few things to consider while looking for the best financing option:

Assess your credit

Your credit score is likely the single biggest factor a lender will consider in determining what interest rate to offer you. Your score is based primarily on your credit reports, which you can get for free by visiting AnnualCreditReport.com.

Check the reports for errors and take action to dispute any that you find, because a higher credit score usually leads to a lower interest rate on a loan.

Get preapproved for a loan

Borrowing options usually boil down to working with a financial institution or with the dealership. Too many people assume the latter is their only option. But you can find a loan at banks or credit unions as well.

For customers with excellent credit, dealerships sometimes offer low- or even no-interest rates. On the other hand, dealers' rates can be markedly worse than those available elsewhere. Among financial institutions, credit unions typically offer better terms than banks.

If you go through a bank or credit union, ask for a preapproval letter. Walking into the dealership with that in hand gives you more bargaining power to negotiate a better price.

Decide what to do with your old car

If you have a vehicle already, trading it in may be enough to cover a down payment or at least serve as a credit against the cost of your new ride. Sites such as Kelley Blue Book and Edmunds can help you appraise the trade-in value.

The dealer may well offer less — sometimes substantially less — than you could get by selling your old car privately. The tradeoff is you'll have the inconvenience and uncertainty of dealing with strangers.

Figure out how much you can afford

Take a look at your financial situation to determine how much vehicle you can afford. What other living expenses, such as mortgage or rent, utilities and other recurring payments already have a claim on your income?

When calculating costs, you might also check with your insurance agent about rates. Why? Because in addition to your driving record, insurance rates can vary depending on a vehicle's maintenance costs as well as the history of claims tied to your specific make and model.

Buying a new car is a major financial commitment, typically second only to purchasing a home. Taking time to figure out how much car you can afford and finding the smartest financing are well worth the effort.