Five Tips for Finding the Best Auto Loan

The first time I bought a car on my own was around the same time my brother bought his. We both knew about finding the right car, but neither of us knew much about finding good auto loans or car loan rates. When we met up to show off our new rides and shared our experiences with the financing process, we realized that we'd each made a few missteps that may have cost us money.

Fortunately, we've learned from each other's mistakes, so our more recent auto loan experiences have been more informed. Getting the best auto loan when shopping for a car only requires a few basic precautions and can save you thousands of dollars.

Tip #1 for finding the best auto loan: Know your credit score.

If you know that you will be in the market for a car in the next year, get your free credit score check from Experian, Transunion, or Equifax. You can check your credit score once annually for free. By taking steps to improve your credit score now, you'll qualify for better auto loan rates when you apply.

Tip #2 for finding the best auto loan: Get pre-approved before you shop.

Some dealers can offer good rates. But you won't know that if you walk onto the car lot without having done some research first. Research car loans on sites like bankrate.com to get an idea of loan rates in your area. Then, apply for pre-approval at the bank or online lender that can offer you the best rate. If the dealer doesn't offer you a competitive rate, you have leverage to negotiate a better one.

Tip #3 for finding the best auto loan: The best rate isn't always the best car loan.

Some dealers will offer 1% or 0% auto loan rates, especially on new cars. While these can be good deals, it typically means the dealer is simply building his profit into the car's price instead of the rate. If you do the math, you may pay less in the long run by buying a car at a lower price and higher-but-still-competitive rate.

Tip #4 for finding the best auto loan: Don't finance the whole thing just because you can.

It's important to avoid getting upside down in a car loan (owing more than the car is worth). Most cars will depreciate faster than a 5-year loan will pay down the balance. Staying ahead of the curve can be tricky, but a rule of thumb is that you should finance no more than 70-75% of the value of the car. Having to put 30% down may limit the cars you're able to afford, but it will likely save you from finding yourself in a bad financial situation later.

Tip #5 for finding the best auto loan: Don't drag payments out longer than necessary.

Once you've taken these precautions and found the car you want at a good price, it's a good idea to get the shortest loan terms that offer a monthly payment you know you can afford. Not only does this make it easier to stay above water on the loan, but the rates on shorter term loans are typically better. You'll have a better chance of paying the loan off quicker and enjoying your car for years payment-free.