If you’re in the market for a new car, the financing process can be intimidating. But if you arm yourself with knowledge and understand the different steps involved, you can make the process much less daunting.

1. Determine your auto loan budget

The question of how much car you can afford is not a simple one, especially considering that buying a car can be a major investment. The best answer to that question, though, is based on your budget and your ability to repay the loan. Consider these three main steps.

  • Determine your current and future financial picture. Look into your current earnings and how likely it is you will continue with your current line of work. If you have a big change ahead, account for that.
  • Consider the full cost of ownership. The maintenance costs, fuel costs and insurance costs that you will incur need to be factored in.
  • Evaluate other costs. In order to make a financially sound decision, you’ll want to keep a budget and understand what your costs outside the car are, like other debt payments.

2. Check your credit report

The first step in getting approved for an auto loan is to review your credit report for errors. Mistakes like duplicate accounts, missing payment history or misspelled names can all lower your credit score and cause you to be denied.

Check your credit score

A credit score can typically be obtained for free from your bank. This is usually your FICO credit score and is updated on a monthly basis.

Not every credit score is on the FICO scale, however. You will need to pay attention to the score type you’re given.

Review your credit report

Your credit report goes into more detail than your credit score. It contains every account you’ve had in the past seven years, including payment history, how much you owe and if you’ve been sued or declared bankrupt.

Credit reports come from the three major credit bureaus: Equifax, Experian and TransUnion. While you can typically only pull these reports directly from the credit bureaus once per year for free, you can currently pull them on a weekly basis for free using AnnualCreditReport.com.

Check for errors

Mistakes, like accounts that are listed as paid off when they aren’t, or late payments that were reported incorrectly can all impact your credit score. Check your report to ensure that everything is correct.

Be sure any changes are requested 30 days or more before you apply. It can take up to the full 30 days to act on your request.

Don’t open new accounts

Opening a new credit account will temporarily lower your credit score. It’s better to hold off on opening additional accounts until after you have your auto loan, if possible.

Limit your credit card use

A high credit card balance can significantly affect your credit score. If you can help it, avoid adding to any revolving credit balances and stick with cash payments.

3. Apply for auto loan preapproval

You can get the preapproval process done before going to the dealership. In fact, there is a good chance that you will be offered a worse rate than the preapproved rate when you step into the dealership’s financing office. This is because dealerships add a commission to any rates offered by the lenders they work with.

Preapproval is also a great way to know exactly how much you will be able to borrow. You can also negotiate as if you were buying with cash once you get to the dealership.
It’s recommended that you apply for preapproval with at least three lenders to ensure you’re getting the best deal.

4. Shop for your car

The next step is to actually shop. Look up different vehicles that match your needs and go to car dealerships to test drive them. Talk with salespeople and compare your options to understand what’s out there, just keep your total buying power close to the chest, as it’s key to negotiations.

It’s important to do the research before you step onto the dealership’s lot, though. With sites like Edmunds and Kelley Blue Book, you can compare different vehicles and how much they’ll cost based on make, model, trim and even your location.

If you’re looking to trade in your current car — especially if you want to buy used — check out online services like Carvana and Vroom. You may get a better deal than you would with a dealership.

5. Finalize the auto loan

Once you’ve found the right auto loan, confirm the terms of the loan. The lender may ask that you send in any required paperwork, including proof of insurance, before you settle on the terms and sign the documents.

  • Sign the auto loan documents. Once you agree on the terms, sign the documents. If you have a co-applicant or co-signer, that person should also sign the auto loan documents. If you have an auto loan from the dealer, the dealer will provide the auto loan contract with the lender’s contact information.
  • Get the vehicle title and registration. You must have your vehicle title sent to the lender and the vehicle’s registration updated to your name, the dealership will usually take care of this if you’re buying from one. If not, work with the seller and DMV to update the necessary documents. You’ll also need proof of insurance.
  • Take possession of the vehicle. After you get the auto loan and complete the sale, you can take possession of the vehicle.

The bottom line

When you’re in the market for a new car the financing process can be intimidating, so arm yourself with knowledge. And if you’re not sure how much you can afford, check your credit score before you visit the dealership.

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