What to know before you shop for a car

When you’re shopping for a new vehicle, it’s important to know the right questions to ask – especially when it comes to financing. With a bit of preparation, you can save yourself money, reduce your stress load, and get the auto loan that’s right for you.

Before you head out shopping, it’s best to make a budget, gather the information you need, and get pre-approved for a loan. Making decisions early gives you time to think about your alternatives, and helps you make the smartest choices.

Budget wisely

With a budget, you have a better chance of ending up with a loan you can afford. A budget also helps you think about ongoing costs such as vehicle maintenance and insurance. You want to be sure that there is room in your budget for both the loan and the other costs of ownership, such as:

• Additional costs at the time of purchase, like taxes, title fees, and dealer fees, and
• Ongoing costs throughout the time you own the vehicle, like insurance, gas, annual registration fees, maintenance, and repairs.

Having trouble coming up with a budget that works for you? Think about ways that you can reduce the cost of your auto loan, like saving for a larger down payment, buying a less expensive vehicle, or getting fewer add-ons, features, or options.

Having trouble coming up with a budget that works for you? Think about ways to reduce the cost of your auto loan, like saving for a larger down payment.

Check your credit report before you apply

The information in your credit report determines your credit scores, which play a large part in determining the kind of auto loan you can get, and how much interest you’ll pay. You can get a free copy of your credit report annually from each of the three nationwide credit reporting agencies at www.annualcreditreport.com. Check your credit report for errors, and dispute any that you find.

Keep in mind that every time a lender checks your credit, it can affect your score – but inquiries that take place over a short period of time (usually 14 to 45 days) typically count as one request. That means it’s a good idea to do your loan comparison shopping within that brief time span.

Decide if you want or need a co-signer

A co-signer is a person – such as a parent, family member, or friend – who is contractually obligated to pay back the loan just as you are. If your credit history is limited or needs improvement, and you have a low credit score (or no credit score), a co-signer with good or excellent credit could significantly lower your interest rate. That is because the lender will rely on the co-signer’s credit history and score in deciding to make the loan.

If you are considering a co-signer, you and the potential co-signer should think carefully before deciding. If you do not repay your loan, you and your co-signer will be responsible, even though he or she has no right to possession of the vehicle. In addition, any late payments made on the loan would affect both your credit record and your co-signer’s. Federal law generally prohibits lenders from requiring a co-signer if you apply individually and qualify under the lender’s standards for creditworthiness.

Think about optional add-ons ahead of time

It’s a good idea to think about loan add-ons ahead of time, so that you are prepared and know what you want on the day you finance your vehicle. These products and services are optional and negotiable. Keep in mind that buying them from your lender will increase the total cost of your loan, and that shopping around may save you money.

Some common add-ons are:

• Service contracts or extended warranties: These optional agreements provide protection for repair costs on certain mechanical and electrical components of the vehicle.
• Guaranteed Auto Protection (GAP) insurance: In case of loss or destruction of the vehicle, optional GAP insurance can pay the difference between the value of the vehicle and the amount you owe on your loan.
• Credit insurance: This is optional insurance that makes your auto loan payments in certain situations, such as death, injury, or loss of employment or property.
• Optional physical features for the vehicle, such as alarm systems, window tinting, tire and wheel protection, and other products.

Your own auto insurance company may offer GAP insurance, credit insurance, or similar products. If you want one or more of these products, check and see if you can get a better price. Lowering the amount you need to borrow means you pay less in interest over the life of your loan.

Research your trade-in

You can look up the value of your vehicle using online commercial websites such as Edmunds, Kelley Blue Book, and NADA Guides. These resources may also be available at your local library. Finding examples of similar vehicles that have sold recently in your area will help you figure out a fair price.

Once you know how much your current vehicle is worth, you can decide whether to trade it in or sell it yourself. If you trade it in at a dealership, you and the dealer will decide on the value to be credited towards the purchase price of your next vehicle. If you sell it yourself, you can use the money you get as a down payment.

If you owe more on your current vehicle than it is worth – referred to as being “upside down” – then you have negative equity. If you roll the balance of your existing auto loan into your new auto loan, this could make the new auto loan much more expensive. Your total loan cost may be much higher because you will be borrowing more than just the price of your new vehicle. Being upside down can also reduce your options if you later decide you want to refinance your auto loan.

Make sure during any negotiations that you consider whether you are getting fair value for your trade-in, and whether you are able to fully pay off the old auto loan.

Now that you’ve done your homework, you’re ready to take the next step: shopping for your auto loan. You can print out an auto loan worksheet and take it with you to the bank, credit union, dealership, and other lenders. Use it to keep track of all the aspects of a loan and compare choices so you can get the best deal.

Adapted from this piece by the Consumer Financial Protection Bureau

FOR MORE INSIGHT

On buying a car
Financial steps to take before buying a car (NerdWallet)
Take control of your auto loan: A step-by-step guide (Consumer Financial Protection Bureau)
Know what is negotiable (Consumer Financial Protection Bureau)
Understand how to close the deal (Consumer Financial Protection Bureau)
Auto loan worksheets (Consumer Financial Protection Bureau)
What is the difference between dealer-arranged and bank financing? (Consumer Financial Protection Bureau)
How do I compare loan offers? (Consumer Financial Protection Bureau)

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