One of the best ways to ensure you're getting a fair deal on a car or truck purchase is to line up your financing before you begin shopping at a dealership.
You absolutely don't want to walk into the dealer's finance department without a loan offer in hand because it could lead you to fall into one of auto-buying's most expensive traps – finance charge markups.
You might think you've negotiated the best price on a new car or truck, but the dealer could cost you hundreds or thousands of dollars extra by offering an auto loan with an interest rate that’s much higher than you could have won on your own.
By getting a preapproved auto loan, you don’t have to worry about the dealer offering a lousy financing deal. Instead, you can compare the dealer’s offer with those from a bank or credit union, and go with the best one.
Just follow these 3 steps, and you'll be prepared to negotiate the best purchase price when you're ready to buy.
Step 1. Check and fix your credit reports.
The first step in getting loan preapproval is to know your credit history.
A Federal Trade Commission report recently found 5.2% of consumers had errors on their credit reports so serious they could lead them to pay higher loan rates.
That's why it's critically important to find and fix any mistakes.
You are entitled by law to a free credit report from each of the three major credit reporting agencies every year. To get all three reports, go to www.annualcreditreport.com.
Check every entry on every report for accuracy. Then contact the reporting agency to correct any mistakes. Each credit report tells you how to do this.
Knowing about your credit will help you get an idea of what to expect for the next step.
Step 2. Contact some lenders.
Ask for quotes from your bank or credit union and at least a few more financial institutions. You can search our database of the best auto loan rates to find lenders in your area.
You should be able to find offers that beat the average 60-month auto loan, which cost 4.00% in our most recent national survey of lenders.
Then you can use our auto loan calculator to compare loans and interest charges.
The best interest rates you’ll see advertised are generally for those with excellent credit — usually with FICO scores well above 700.
But even if you have a lower credit score, you could be better off working with a loan officer. He or she may help you find affordable financing that still beats a dealership manager’s offer.
You don’t have to have a car or truck picked out before getting an auto loan. But you do need to understand each lender's rules. For example, some lenders will require you to purchase an auto from an established dealership before they lend money.
If you’re shopping for a preowned auto, outside of restrictions on where you can buy the car or truck, many lenders also set limits on the age and mileage of the vehicles they finance.
Whether you’re looking for a new or used car, make sure you’re aware of application fees, loan fees and any other charges.
Also, make sure you know about interest rate discounts. For many lenders, the lowest advertised interest rate includes a discount for setting up an auto-pay of the loan from a checking account that is opened at the financial institution. If you choose not to use the auto-pay program, your rate may be slightly higher.
After you’ve shopped around, apply for the most affordable auto loan you find. Many lenders will let you apply online, and you could have an answer within minutes.
Just because you have been preapproved doesn’t necessarily mean that you have to accept the bank’s loan.
You can still go to the dealership and try to get a better deal.
If you have great credit, you may even be able to get 0% financing on a new car, the best discount.
Step 3. Stick to your budget.
After you are preapproved, you can go car shopping with confidence.
Be sure to look for cars and trucks that are priced slightly lower than your loan amount.
Even if you’re able to negotiate a lower price, the cost of taxes, title, insurance and destination charges can add thousands of dollars to the purchase price.
To save on interest payments, it would be best if you could pay for these fees when you purchase the vehicle, instead of rolling them into the balance of the loan. Look on the auto manufacturer’s website to determine destination charges, and contact your local tax office to determine how taxes would be figured on the purchase.
Some lenders have "blank check" programs where they will issue you a check that you can write for the negotiated sales price — up to the amount of the loan that you qualify for. When you agree on a price with the dealership manager, you can then deliver the check to the dealer.
And if you get a better offer from the dealership's finance manager, then you typically aren't under any obligation to use the check from the lender.
You can truly shop with confidence.
This article originally appeared on Interest.com.