Shopping for an Auto Loan

Negotiate a fair price.

When you're ready to sit down and negotiate price, it's important to have an idea of your walk-away price. Your walk-away price should be based on your research of the car and what the fair market value is.

Make a sizable down payment.

It makes sense to pay as large a down payment as you can afford. Doing so reduces the amount of money you must borrow to pay for your new vehicle, and therefore lowers its total cost. You'll reap the rewards in lower monthly payments.

Most experts recommend a 20% down payment or more. This amount will most likely keep you from ever owing more than the car is worth. In fact, many lenders require this amount to approve an auto loan.

Pay out of pocket?

Paying out of pocket is almost always less expensive than financing the purchase. Unless you can invest your money at a rate that is higher than the car loan rate, you would be better off paying in cash. But be careful! Leaving yourself unprotected in the event that you need emergency funds would be far more financially damaging than taking out a loan for the car.

Understand interest rates and APR.

All lenders are required by law to quote interest as an annualized percentage rate (APR) of the monthly loan balance. What does that really mean? Well, your APR includes all charges associated with the loan -- such as credit report fees, application fees, and origination fees. A number of forces affect the APR you'll pay on your auto loan, such as:

• Where do you live? Interest rates for loans vary by region.
• Who is lending the money? Different lenders charge different amounts, based on the competition in their field.
• How long is the loan for? Short-term loans are generally cheaper than long-term loan
• What other market forces are at work? Other market forces always have an effect on current interest rates.
• Your credit score and credit history.

Get the right auto loan term

For new cars, loan terms of 60 months and more have become common. This is due partly to increasing prices that have made traditional 24-, 36-, and 48-month loans less affordable for many buyers, and to the increasing reliability and life expectancy of new vehicles.

Even so, you should still be wary of loans with terms longer than 48 months. If not, you could find yourself owing more on your car than it's worth.