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How to Get the Best Deals on Car Loans

When you want to buy a new car, financing the purchase is usually necessary. Many lenders, including some automakers’ banks and dealerships, offer car loan with competitive rates. But you can also find great deals on car loans from credit unions, banks and other online lenders. Regardless of how you obtain your loan, it’s important to comparison shop for the best rate and carefully consider all the terms and conditions before making any commitments.

Many consumers don’t think through the financial implications of a car purchase, says an assistant professor in MIT’s economics department who has studied millions of auto loans. They tend to focus on the car price and neglect other costs, such as interest. That leads to bad decisions that can cost borrowers big.

Most people don’t have enough money saved to pay for a car in cash, so they turn to loans to help finance the vehicle. In addition to the monthly payment, car buyers have to factor in the initial purchase price, taxes and other fees. If you don’t calculate these costs, you could end up spending more than the car is worth.

To qualify for a car loan, you must typically provide income information in the form of paystubs or tax documents and have a good history of paying debts on time. Some lenders may require additional documentation, such as proof of employment and a credit report.

Some lenders allow borrowers to prequalify for a loan amount and interest rate based on limited personal and financial information. But a prequalification isn’t a guarantee of funding, and the estimated interest rate can change if the lender performs a full credit check before the loan is approved.

Dealerships and automakers have their own banks to finance car sales, and they sometimes offer below-market interest rates on loans to get customers in the door. But you can often get a better deal on a car loan by shopping around.

The more you pay down a loan, the more equity you’ll build in your vehicle. That can give you options later, such as selling the car for cash or using it as collateral for another loan. Moreover, it’s generally best to keep a car loan term short. That’s because cars depreciate quickly and the longer you own your vehicle, the more you’ll owe overall. A shorter loan term means you’ll have your car paid off sooner, which will free up cash for other expenses and emergencies. It will also help you avoid paying for costly add-ons such as service contracts or credit insurance, which you might not need. A free credit report can show you your credit standing so you can take steps to improve it before applying for a car loan. Then you’ll be able to compare loan offers with confidence and choose the right one for your budget and needs. For example, if your credit is below average, you might be better off with a secured credit card or a co-signer on your auto loan.