Ready for a new car, but nervous about navigating the dealership and financing? For most of us, the amount of our monthly payments is a big factor in how much car we can afford to buy. Knowing where you stand with all three credit bureaus before you hit the dealership can put you in the driver’s seat – and help you get the most bang for your hard-earned bucks.
Use this checklist to prepare for the car-buying process and make the best use of your purchasing power:
1. Check your credit scores from TransUnion, Equifax and Experian.
Your credit scores determine the interest rate you get from lenders. In turn, that interest rate determines your monthly payment – in other words, your purchasing power. Higher scores qualify you for lower rates – meaning you can buy a nicer ride without raising your monthly payments.
2. Set a realistic budget to determine the car payment you can comfortably afford.
Most lending experts agree you can spend between 28 and 36 percent of your gross monthly income on all of your monthly debt payments (called “total debt service”). This means your car loan, mortgage payments, credit cards and any other debt or loan payments shouldn’t exceed 36 percent of your gross monthly income.
3. Decide how much you can put down.
The larger your down payment, the more equity you’ll get in your car up front. An ideal down payment is 20 percent, but today’s average is closer to 12 percent. The trade-in value of your current car can be credited toward the purchase of the new car, helping to reduce the cash you put down.
4. Get pre-approved before going into a dealership.
Your bank or credit union can help you lock in a car loan with a competitive interest rate, up front. Walking in with a pre-approval shows the dealerships you’re serious about purchasing a car now – and you avoid the stress of haggling over price and terms to get a monthly payment you can afford. Sometimes, dealers will even meet or beat your pre-approved interest rates.
5. Get multiple quotes on the cars you like – and don’t be afraid to negotiate.
Get quotes from dealerships in your area, then negotiate the best price. Ask dealers if they can beat the lowest price you’ve been quoted, and continue to go back to the most competitive dealers to see if they’ll bring the price down even more. Don’t hesitate to walk away from an offer that’s beyond your means.
Remember, the better your scores, the more leverage you have in negotiating for the car and payment you desire. It starts with understanding how to build, maintain and protect your credit score to maximize your purchasing power – now and in the future.