Step 1:  Check your credit report and score

Before you shop for a car, know your credit score and credit history. Fixing mistakes can save you money on a car loan.

When buying a car, one of the first things you should do is check your credit report and score. Many people need a loan in order to buy a car, and if this is true for you, you want to be sure that everything on your credit report is correct. Mistakes could hurt your credit score, which could cause you to be charged higher interest rates.

Credit report basics
There are three major credit bureaus: Experian, Equifax and TransUnion. These bureaus gather information on your credit payment history, which forms the basis of your credit report. The information they compile includes your current address and past addresses; the amount of debt you carry, what kind of debt it is, the lenders’ names, and your debt payment history; how often credit report inquiries are made; and your history of liens and bankruptcies.

Your credit score
Each bureau takes your credit report information and uses it to score your credit. Your credit score is a number between 300 and 850, with 850 being the best credit score and 300 the worst. Lenders use your credit score as a general indicator of your creditworthiness, so if your credit score is low, you might be charged higher interest rates.

How to check your credit
You can get your credit report for free; however you must pay for your score. Every year, you can request a free report from any of the three credit bureaus. That means that you can check your credit report without paying a fee once every four months. You can get a free report and a free credit score with a 30-day trial membership in LendingTree credit monitoring. With membership, you get your free credit report and score online in seconds.

Fixing mistakes
Mistakes can happen, especially for people with similar names or Social Security Numbers. That’s why it’s important to check your credit before you start the car buying process. If there is an error on your credit report that could negatively impact your credit score, you want to have plenty of time to contact the bureaus and get the error corrected. All you need to do to correct an error is write the credit bureau, explaining which information is inaccurate. The credit agency must investigate the items in question, usually within 30 days. Then you’ll get written confirmation of the corrections.

What if you have bad credit?
If you discover that your credit report is accurate, but your credit score is low, you may want to hold off on buying that new car. Instead, take a few months to improve your credit score by paying down your debt and paying all your bills on time. While you’ll have to wait several months, the result should be a better interest rate on your car loan, which will save you money in the long run.

Step 2: Finding the car for you

Do your research ahead of time to determine what features you want in your next car.

There are so many options to choose from when buying a car, that a decision that should be fun can become overwhelming. But don’t despair, our guide will help you narrow down your choices.

Your budget
First, determine how much you can afford. If you have cash saved to pay for a new car, figuring out what you can spend is fairly easy – it’s your savings for your car. However, if you need a loan to buy a new car, you need to determine what your down payment will be, and how much you can afford to pay each month. The bigger the down payment, the lower your monthly payments. Just be sure that when you are working with a monthly payment number, you don’t get stuck in a loan that will last longer than the car. A 3-year car loan term is ideal; any more than 5 years and you’re probably buying a car you really can’t afford.

What are your needs and wants?
Next, figure out what you want out of your car. Do you simply want to replace your 12-year-old car that just died with something similar? Do you have a new baby and need more room? Or is having a luxurious car with lots of bells and whistles important to you? Answering these questions should help you decide if you want an SUV with lots of storage and towing capacity, a small car with excellent gas mileage, or a car that’s fun to drive.

Now, you need to narrow down your choices within the type of car you’re looking at. Think about your budget, your daily commute, who will be driving the car and how long you plan to keep it. Use this list of needs and wants to narrow your choices down to a few models within your price range. Research each model to figure out which ones make the most sense, and then go for a few test drives.

What features do you want?
For each model you are considering, check to see if it has the features you want and need, and how much they cost. Consider safety features such as airbags and anti-lock brakes, and luxury features such as leather seats, satellite radio and a navigation system. Keep track of how the base price increases as you add features; you may find some base models come with more than others, giving you more for your money.

Step 3: Deciding whether to lease or buy a car

Learn the circumstances on whether it is better to lease or buy so you can make the right decision for your finances.

If you are in the market for a car, you will need to decide whether you want to buy it or lease it. Both are good options depending on what your financial strategy is and how long you plan to keep your car.

If you don’t have enough money for a standard down payment on a car, leasing might be the best option for you. Similarly, if you like to get different cars every few years and you are not interested in making changes to the factory settings on a car, a lease might be the best way for you to go.

But if you plan to keep your car for a number of years and you have a substantial amount of money for a down payment, you might find that buying a car is the best plan. When you buy a car, you might have to get a loan, but you can do as you wish to the car.

If you are still riding the fence about whether to lease or buy, keep in mind that leasing may be able to get you lower interest rates than a car loan. So if you are on a tight monthly budget, leasing might work best for your finances. Also remember there might be mileage restrictions on a leased car, so if you put a great deal of miles on your car each month, you might want to consider buying instead.

Remember that both leasing and buying a car come with pros and cons. Be sure you understand the terms and rates on loans and leasing agreements before you commit so you can fully understand what you are getting into. Being stuck in an arrangement you can’t manage means you run the risk of damaging your credit and losing your car.

Step 4: Financing your car purchase

Paying cash will save you money, and shopping around will get save you interest on a loan.

Pay in cash
If you have a great deal of money saved, you might want to go ahead and pay for your car in cash. By paying in cash, you avoid the added cost of financing charges associated with getting a loan, which can save you thousands of dollars over the life of your car. If you do pay cash from money you have saved, be sure you don’t completely wipe out your savings. Keep enough in savings in case of an emergency, and be diligent about replenishing the money. That way your next car can be paid for in full too!

Home equity loan
One way to lower your interest costs when buying a new car is to use a home equity loan or line of credit. A home equity loan may have a lower interest rate than a car loan, since it is secured by the equity in your home. In addition, the interest you pay on a home equity loan is generally tax deductible, which means you save even more (check with a financial advisor about your particular situation). And with a home equity, you don’t have to worry about having a down payment saved.

Remember though, that you’re home is at risk if you can’t make your payments. With a car loan, all you lose by not paying is your car. With a home equity loan, if you default, you can be forced to sell your home. So make sure you can easily afford your monthly payments.

Car loan
If you don’t own a home, or if you don’t have enough equity in your home to borrow against, you’ll need a car loan. Financing through a dealer is convenient, but it can also be more expensive, because it’s another way for a dealer to make money from selling you your car. Also make sure the dealer’s loan terms aren’t set up to match your monthly payment. If the dealer knows what you can afford each month, he can structure a loan that meets that payment but still ends up costing you more than independent financing.
Before you go with your dealer’s financing, shop around to make sure you’re getting the best rate. LendingTree has a network of auto lenders that compete for your business. You fill out one form and get back up to four offers in minutes, making it easy for you to compare terms among lenders.

Step 5: Negotiating the price

Don't be intimidated at the dealership. Remember, you're the customer and you can take your business elsewhere.

Car buying is one of the few areas of American life where you must negotiate. This can be intimidating, and it’s hard to walk away from a deal when you’ve fallen in love with a car. But, you should get a deal you’re happy with if you keep these three easy tips in mind:

1. Know the invoice price.
Before negotiating, know how much your car should cost. Don’t start with the sticker price and go down, start with the invoice price. And your research doesn’t end there. Also check to see if there are any rebates or incentives available on the model you’re buying. Often manufacturers will give dealers rebate money to move cars, essentially lowering the invoice price for the dealer.

2. Negotiate the total price, not monthly payments.
Always talk total price, not monthly payment, even if you’re getting a loan. While you know what monthly payments you can afford, you should not tell the dealer. By negotiating the total price of the car with the dealer, you ensure you get the best price for the car. But if you negotiate only the amount you would pay each month, the dealer may give you a good price on the car, but then sell you a loan that costs you more than it should, either through a higher interest rate or longer term. Be clear with the dealer about what you want to pay overall and once you reach an agreement, get in writing.

3. Shop around and be patient.
Some buyers shop by phone, giving several dealers the exact specifications of the car they want and asking for a price. Just make sure you have the dealer fax or email you the details in writing. Otherwise you may get to the dealership and they will have “forgotten” the good deal that got you in the door. And if they won’t honor the price they gave you, leave.

If you prefer to negotiate face to face, don’t be afraid to walk away if the dealer isn’t being as upfront as you like. Remember that you are in charge of the negotiation and that you have more negotiating power than the dealer. Don’t let them scare you by telling you only one of the model you want is left. Unless you’re buying hot-selling car, there are plenty left, and they can get cars from other dealers as well. If you walk away, chances are the dealer will call you tomorrow with a better deal.

4. Shop smart.

Shopping at the end of a month can speed up a deal. Dealerships and salespeople have sales goals to meet, so if you find one who is behind, you might be able to negotiate a better deal. Also keep your eyes peeled for holiday and end of the model year specials. Usually sales events of this kind offer good incentives to buyers, so you might be able to work out a lower price than at another time of the year.

To find the right auto loan for you, visit lendingtree.com, the preferred auto loan provider for AutoTrader.com.


Provided by LendingTree.

Copyright 1998-2008, LendingTree LLC. All rights reserved.

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