Buyers’ guide to financing a vehicle

The price of the average car continues to rise. Analysts at Edmunds estimate the average transaction price of a new vehicle now hovers at roughly $36,000. Few people can walk into a car dealership and pay such a price in cash, which means that savvy shoppers need to familiarize themselves with the financing process in order to get their dream rides. In addition to finding the perfect car or truck, buyers must spend time researching the ideal way to pay for it. Car loans are key to the car-buying process. Too often shoppers wait until they’re in the negotiating seat at the dealership before they even know what they can spend, and this can be a mistake. A poor financing deal hurts buyers over the long run and may lead to defaulting on the loan and dealing with the credit fallout that defaulting produces.

Vehicle financing is a step-by-step process that should begin long before consumers even pick out a car.

Examine your spending and saving. Start by looking at your finances and establish a budget. How much cash do you have on hand for a down payment? Also, how much can you comfortably devote to a new car payment and requisite auto insurance? You can use automotive loan calculators to get a rough idea of what a particular car will cost you in terms of monthly payments.

Know your credit standing. Great credit will give you financing leverage. Understand your credit score and which factors may be bringing it down. Resolve any issues well before you apply for financing so a bad score will not hurt you.

Visit lenders. The financing deal offered by the dealership might not be the best price possible. You can get preapproved/prequalified for an auto loan the same way you do for a home mortgage at banks and credit unions. This helps you secure the best interest rate possible. It also provides negotiating power. A preapproval letter puts you in the position as a stronger “cash buyer,” states the financial resource NerdWallet.

Set a firm buying price. Preapprovals and working with a third-party lender gives you a specific amount of money you know you can borrow. Use this as a tool to keep the negotiated price low because you cannot exceed your preapproved amount. It also may be a way to push dealership finance mangers to contact their own captive lenders to try to beat the rate offered by your existing lender.

Work is needed to secure the best price on a new car, and that work begins long before visiting a dealership.