What Not to Do When Applying For a Car Loan

By Liz Opsitnik
Friday, Nov 20 2009 18:18

When deciding how much you can afford for a car payment, take a realistic inventory of your expenses. Take a notebook with you and write down everything you buy for a week or two, that way you’ll be able to come up with an honest budget for your new car. Your credit score will be best if your expenses are only 30% of your income before taxes. You’re better off choosing a car you can comfortably afford over one you would have to stretch to make the payments on and saving money in case of an emergency. Just one missed payment can hurt your credit and force you into a higher interest loan further down the line.

If you have no idea what your FICO (credit) score is, don’t even step foot on the lot of a car dealer. There’s no sense in spending all day looking at and test-driving cars only to get to the finance manager’s office and find out that your credit score isn’t good enough to qualify for financing. Plus, knowing what your credit score is beforehand might help you get financing through a private lender, which might get you a better interest rate than the dealer can give you.

Before you decide on a car, get insurance quotes. For young buyers or people with less than perfect driving records, insurance can cost as much as or more than your car payment. Keep in mind that in general, the more you spend on your car, the higher your insurance bill will be, so just because you can make the monthly payment on your dream car doesn’t mean you can actually afford it.

Confused or unsure about some of the car loan terms used in the article? Click here for our Auto Loan Glossary.