Check out NerdWallet’s auto loans guide
We’re here to help guide you through the essential steps, including setting your budget, understanding your loan options and negotiating with confidence.
Know your credit score and history
Unless you plan to pay cash, you’ll need to start by taking stock of your credit before shopping around for a car loan. Request your credit report from AnnualCreditReport.com and check your credit score, too, to avoid unpleasant surprises when you’re ready to buy. You can buy your FICO score, the most widely used credit score, at
myfico.com . Or, take a look at your credit card bill; some companies include the cardholder’s credit score on the monthly statement.
“For buyers whose credit history — or lack thereof — would force them into a high interest rate, finding that out ahead of time is valuable. It’s easier to make smart financial decisions at home than it is at the dealership, holding the keys to that shiny new or used car you want so badly,” says Jason Allan, managing editor for Kelley Blue Book’s KBB.com.
Figure out your payoff or trade-in value
If you’re getting rid of your current car, you’ll have to decide whether to sell it yourself or trade it in. Typically, you’ll get more money if you sell to another consumer rather than to the dealer, but it will take some extra work on your part. It boils down to a choice between value and convenience. Some people are leery of dealing with strangers or don’t want the responsibility of preparing a car for sale.
Compare your car’s
KBB.com estimated trade-in value and its estimated private party value, which indicates the price you can expect if you sell to another consumer. That will help you decide whether it’s worth selling it yourself.
If you decide to trade your car in and you find yourself negotiating over its value, don’t be shy about using car-shopping apps on your phone to check for competitive offers before you accept what the dealer is offering. If you’re still making payments on your current car, contact your lender to see what the payoff amount is and whether there are any fees for terminating the contract; the dealer will need that information.
Another option is to take your old car to a national used-car chain that gives fixed-price offers, like CarMax and AutoNation. You can get a free, no-pressure written offer, then compare it with the dealer’s trade-in offer.
Shop for a loan and get pre-approved
Loans arranged by dealerships can be very competitive — or very expensive. It depends on a lot of factors, including your credit history, the car model and even the time of year.
Don’t assume that a loan through the dealership is your only option. Shop around for an affordable loan from your bank, credit union or other lender, and ask to be pre-approved. Take the pre-approval notice with the terms spelled out when you go to the dealership.
“For first-time buyers it’s an especially good idea to arrange financing before heading to the dealer. Securing a good rate ahead of time can help prevent costly financing mistakes during negotiations,” says Allan.
Set a realistic budget
Now, it’s time to set your budget. You can use two different calculations to make sure it’s workable. First, add up the amount of your pre-approved loan, your trade-in value and any down payment you plan to use. Then subtract about 10% to cover taxes and fees. That should give you a reasonable price range for your car.
Then check your budget based on the monthly payment you can handle. Websites like
Edmunds.com and NADAguides.com have affordability calculators. Plug in your desired payment, loan length and estimated interest rate, and they calculate the price range you can afford. Some tools suggest affordable models to consider.
Consider total cost to own the car
Find out how much your vehicle will cost to own. Similar cars can have different operating costs. That stylish SUV may seem less appealing when you realize that it costs 58% more to operate than a fuel-efficient sedan. A median car costs about $9,000 a year to own during its first five years, which is comparable to a large SUV. By contrast, the Mini Cooper costs about $5,800 per year to own, and the Toyota RAV4 about $7,800, according to NADAguides.
For cars you’re considering, you can look up a metric called “5-year cost to own” that tallies ongoing expenses — including fuel costs, maintenance and repairs, depreciation and others — on sites such as Edmunds.com, KBB.com and NADAguides.com.
Read car dealer reviews
Ready to test drive? You probably read user reviews before trying out a new restaurant or hotel. Put the same effort into choosing a car dealership. Sites like Yelp and Google have plenty of consumer reviews for car dealerships, as do auto websites like DealerRater.com, Edmunds.com and KBB.com.
Remember to use common sense with online reviews. Disregard anything that strikes you as overly biased. Try to get a feel for whether other visitors found the dealership and staff to be helpful and honest before taking your business there.
Research prices online
Once you’ve zeroed in on the model and options that you want, you can start gathering price information to use for negotiating a good deal. Do all your online price research first, including reading car reviews, so you’ll have points of reference, then ask for quotes from dealerships.
For each vehicle, you’ll want to know more than just the sticker price, also called the manufacturer’s suggested retail price.
In addition to MSRP, look up the invoice price, typically a lower price that is a rough indication of the dealer’s cost for the car. Keep in mind that invoice price does not account for undisclosed manufacturer-to-dealer payments that lower the dealer’s true cost.
For a third benchmark, look up what buyers have actually paid in recent transactions in your area. Many websites, including Edmunds.com and KBB.com, track market prices based on real sales data.
Instead of starting with the sticker price and trying to negotiate down, you’ll be better off if you start the negotiations at the dealer’s invoice price, and go up as necessary.
Read more about auto loans
Request quotes from Internet sales departments
Now, you’re ready to get price quotes from dealerships. Get at least three quotes. Rather than physically going from dealer to dealer, do this on the phone or through dealer websites.
Try this method recommended by Edmunds.com: Call three dealerships that have the car you want and ask for the Internet sales manager. Compared to traditional salespeople, reps from a dealership’s Internet department are accustomed to working with web-savvy customers who have done their price research. That means they are likely to quote you a lower price. Ask them to email you their quotes so you can consider them carefully in a relaxed setting.
Then, try to leverage the offers for a better price. Call the dealership that had the lowest bid and say, “I’ll buy from you instead of these others if you can lower your offer by X.” This armchair method of car shopping will save you time and stress, and may yield a lower price.
Final steps
Once you’ve agreed on a price, most of the work is done. Walking into the dealership with your loan pre-approval, trade-in and written price quote, you’ll feel confident and in control of the deal.
Before the deal is signed, the dealer may pitch you extras like extended warranties and service contracts. Recognize that this is a last-ditch effort to increase profits by adding items to your sales contract. Your pre-approval gives you an easy way to deflect unwanted offers. Just say, “I have financing arranged for this budget, and I’m not going to spend any more.”
You can also take this last opportunity to sweeten the deal for yourself. Though you already have an auto loan arranged, you can still fill out a credit application to see whether the dealer can offer even better terms. Sometimes dealers, through their relationships with automakers, are able to arrange very competitive or even zero-interest financing, especially for customers with good credit.
Conclusion
The process of buying a car has changed a lot in recent years, in consumers’ favor. Thanks to a wealth of resources online, including real pricing data, car buyers can arm themselves with information and walk away with a better deal.
Jeanne Lee is a staff writer at NerdWallet, a personal finance website. Email: jlee@nerdwallet.com.
Image via iStock.
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