Buying a car: few purchases in your life are more important.

But many people looking to buy a car often don’t understand the best way to go about the process. Is pre-approval really necessary? What APR rate is appropriate for a car purchase?

Below we’ve included the necessary 7 steps you should complete before and during the process of reaching out to a car loan provider for finance options.

1. Save What You Can

The larger deposit you put down, the greater your chance of getting approval for your vehicle loan application. A difference of $1000 could greatly change the types of loan rates and terms that you’re eligible for.

Before you apply for a car loan, save as much as possible to put down for your deposit. Remember that your future car is a depreciating asset: the moment you buy it, it will decrease by 10% in value – but your liability will stay the same.

Paying a higher downpayment will mean lower monthly car payments in the future. You’ll pay for lower interest charges and won’t end up paying for a car that no longer has the same value.

If you have the option to save up for a few more months instead of taking out a loan, you’ll fare better in the long term. But you can still take out a loan in a way that won’t eat away at your savings.

2. Look at Your Credit Score

You should also take a look at your credit score. Car finance, as with any other form of borrowing, could potentially improve or impair your credit score.

When you apply for car financing, lenders will perform a credit check. The number that they see will determine how willing they are to give you a loan.

There are two types of credit checks that they could perform: soft and hard.

A soft credit check is a look at your credit history and will only look at limited information on your credit report. Soft checks don’t impact your credit profile.

A hard credit check gives a financial company full access got your credit report. It will leave a permanent record that the check occurred and could lower your score. Try to leave at least 12 seek between hard credit checks to show lenders that you’re not a risky borrower.

This is where knowing your credit score comes in handy. If you’re aware of your score, you can approach lenders who you are more confident will offer you a loan.

By only approaching a few select lenders, you’ll reduce the number of credit checks being performed and will make you more appealing for a loan.

Credit card companies will let you know when a credit check is due to be performed. Unfortunately, you can’t get a car loan without a credit check – because car loans are a form of borrowing, every lender will want to see how trustworthy you are.

3. Consider the Effects on Your Mortgage

Taking a loan out for a car could also impact your future mortgage. It’s important to consider what the effects could be before you approach a car loan provider. Here’s what you need to know:

If you borrow money to buy a car and make all of your payments on time, your credit score should go up. A high credit score should lead to a better mortgage deal.

But say you take out a car loaning agreement and don’t pay on time and in full. Expect your credit score will decrease. The more you miss payments, the lower it will get.

If you’re planning on purchasing a home in the next few years, make sure that any debt you take on beforehand is in your budget. Missing a few payments now could mean that you can’t finance your dream house down the road.

Failing to pay the debt could also put your existing properties at risk. Many forms of financing use your home as collateral (which is why homeowners often get better deals than renters). But if you repeatedly fail to pay, the lender may try to leverage your property as payment.

4. Determine Your Loan Budget

Before you approach a lender, you must determine the maximum loan amount that you’re able to borrow. When you have this number in mind, they’ll be able to give you information on what you can expect your loan to look like and what your monthly payments could be.

Without a loan budget in hand, the best you can get from lenders is a general estimate of what your loan will cost, which is subject to change.

When determining your budget, don’t fall under the trap of looking at monthly payments. Many lenders offer payments that are so low that they seem almost too good to be true – and they often are.

Low payments always mean a longer loan, so you’ll end up paying more interest in the long run. By the time you repay the loan, you’ll end up covering hundreds to thousands more than if you had opted for a higher payment.

Figure out an amount of interest that looks good to you, and then plan out your payments over the total period of the loan accordingly.

5. Learn About APR & Determine Your Target Rate

And to find out that target rate you’ll have to look at the APR for your loan.

The annual percentage rate (APR) refers to the amount of interest that you pay each year. The APR will vary deepening on the lender and often will be a reflection of our credit score.

To find the amount of interest due, the lender divides the APR by 12 to determine the amount owed each month. This is in addition to the capital you borrowed.

Your monthly payments are then calculated by dividing the entire loan (plus interest!) by the length of your loan. So, a loan paid back over 12 months will have higher monthly payments but will end up costing less in total than a loan paid back in 24 months.

Here’s what you can expect your average APR rate for a new car to look like based on your credit score:

  • 300 to 500: 14.59%
  • 501-600: 11.03%
  • 601-660: 6.61%
  • 661-780: 3.48%
  • 780-850: 2.34%

Once you get past the 600 mark, your APR rate almost halves. So aim to have a credit score of at least the low 600s when you’re applying for a new car loan. If your credit score is lower but you still need to take out a loan on a car, you’ll have to factor in the extra APR.

6. Try to Get Pre-Approval

Once you have an idea of how much you’re willing to spend and what your APR rates will look like, you can start reaching out to car loan providers to get pre-approved for a car loan.

It’s always wise to get pre-approved for a financing offer from a bank or credit union before you walk into a car dealership. Having this pre-approval means that you’re guaranteed to have coverage for the kind of car you want.

Once the car loan approval process is complete, you’re in a much better position once you arrive at the car dealership. You can just focus on the cars that you know will meet your budget instead of getting caught up in the salesman’s pitches.

You’ll also become irresistible to the salesmen – they know how much you can spend and will target their tactics accordingly.

But you’ll have more power over them because they’ll try to get you to reach the top levels of your budget. You can ask them to throw in extra features or upgrades without jacking up the cost because you have a paper in hand that only gives you the ability to spend a fixed amount.

7. Keep the Process Within 14 Days

Two weeks sounds like a tall order for getting your loan pre-approved and starting to look for vehicles. But if you can keep your loan process within 14 days once you start, your credit score will thank you later.

Earlier we touched on the effect of hard checks on your credit score. Every time a lender checks your credit history, your score will go down. But if you keep your application within two weeks, the negative impact will be much less.

These 14 days is known as the “shopping period,” so all inquiries made during that time will be considered as just one inquiry.

Your score will only go down as if one lender checked your score, even if 4 did. Having your vehicle loan set before visiting the dealership is the best choice if you’re concerned about your credit score.

And wait to apply for a new credit card or any other loans if you’re in car-buying mode.

The Best Ways to Finance Your Car

Finance your car the right way by educating yourself on your credit score, planning our your goals for the loan, and streamlining the loan process as much as possible.

Curious about learning more? Reach out to our team to see how you can quality for a car loan pre-approval.