How to get a car loan 

May 1, 2012 at 4:35 a.m. ET

You've found your dream car and negotiated the price. Before you sign on the dotted line, make sure you're getting the best possible car loan. Here's everything you need to know to finance your vehicle.

Woman car shopping

Know your credit

It's helpful to check your credit rating before applying for car loans. The higher your credit score, the lower the interest rate you will be able to secure for your car loan. If your credit score is low, consider postponing the purchase of your vehicle, while you focus on paying your bills on time and improving your credit score.

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Understand car loan terminology

Before you plunge into the car financing process, bone up on your understanding of the different parts of a car loan. You don't want to be confused when evaluating your financing options. Here are the car loan terms you will need to understand:

  • Down payment -- A down payment is the amount of money you pay up front when purchasing a vehicle. Generally, 20 percent of the total purchase price is the required amount for a down payment. If you have a vehicle to trade in, the value of the trade-in vehicle can be applied to the down payment.
  • Interest rate -- The interest rate is the rate at which your loan is financed by a financial institution. This is the cost of borrowing money. A high credit score will help you secure a loan with a lower interest rate.
  • Term of loan -- The term of the loan is the amount of time you will have to pay back your loan. The longer your term, the lower your monthly payment should be. Common terms for auto loans are 36, 48, 60 or 72 months.

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Get pre-approved

Boost your negotiating power by getting pre-approved for a loan before you visit the dealership. Prior to making an offer on a car, contact a bank, online bank or credit bureau to apply for loan pre-approval. Walking into the dealership with your pre-approval in hand shows you have a solid financial understanding and an actual offer to compare with the dealer's best offer. The dealership will have to meet or beat your standing offer in order to get your financing business.

Calculate and evaluate

You have three main sources of car loans: Auto dealerships, banks and credit unions. Go ahead and shop around to determine which financial institution can give you the best loan that meets your needs. Take advantage of online loan calculators to plug in loan amount, down payment, interest rate and term of loan to determine what your monthly payment will be. Be sure to evaluate the total purchase price and any associated fees, in addition to the required monthly payment.

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Watch: How to buy a new car

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