How to Prepare for an Auto Loan

Before you get auto loans, you want to make sure you're fully prepared. Here are some things every borrower should do before you apply for your loan.

Take a Look at Your Credit

Don't get ambushed by credit surprises when you apply for auto loans. Before you even start shopping for your loan, you should have already thoroughly reviewed your credit report. This serves a dual purpose. For one, you can check your report for any mistakes and have them corrected as soon as possible. You will need to do this in writing with the credit bureau. Secondly, taking a good look at your credit report will give you a better idea of what your credit standing is. If you see items that could work against you, like overdue credit card payments, you could try to remedy them prior to applying for your auto loan.

Save for a Down Payment

The smaller your auto loan is, the easier it will be to pay off and the less you will pay in interest. Thus, you should always try to make the highest possible down payment and borrow only what you absolutely need. The 20% rule still holds for down payments on auto loans. A down payment of this size will essentially counteract the dramatic depreciation of your vehicle in the first year. As you may know, your car's value will drop 20%-30% the second you drive it off the lot. Having a sizeable down payment can help you from then owing more on the car than it is worth.

Know What You Can Afford

You don't want to over-borrow or buy too much car, and the only way to avoid this is to sit down with your monthly budget to figure out exactly how large of a payment you can comfortably afford. A good rule of thumb is to have your auto loan payment take up no more than 15%-20% of your gross monthly income. If you don't have enough room in your budget to buy a car right now, you can always save for a while to build more of a down payment.

Get Your Documents in Order

When you take out auto loans, most lenders will require that you present some documentation. This usually includes income tax returns, pay stubs, proof of insurance, and a driver's license. Make sure you have all of these documents ready to go when you apply.

Research Interest Rates

Without knowing the prevailing interest rate for auto loans, you can't judge whether the rate you get is competitive or not. Look up the market interest rate online. You can find dozens of sites that offer this information and even provide calculators to figure out your monthly payment based on your expected interest rate. Keep in mind that your auto loan won't necessarily come with the lowest possible interest rate automatically. It will also depend on your lender and your credit.