Check Your Credit

Your first step should be to check your credit report. Your credit history covers your past major expenditures, as recorded through your credit card and loan records. Any failure to repay a loan or to pay a bill in your past may lead to a bad credit history, which will make it more difficult for you to secure financing. This will mean any financing you're offered is likely to come with higher rates and fees.

You can get a copy of your credit report from any of the three major consumer reporting agencies: Equifax, Experian, or TransUnion. Many credit reports also come with a FICO credit score, which is the rating institutions use to determine how reliable you're likely to be in repaying a loan. Knowing that score will help you assess where you stand when seeking a loan.

Go through the credit report you receive, and make sure all of the information is valid. If there's incorrect data in your credit report that's resulting in a lower credit score than you deserve, take the time to work with the reporting agency to correct that information before you start seeking a loan. Simple clerical errors, or accounts that you've forgotten to close, should be relatively easy to take care of.

Shop Around

In most cases, it's best to secure financing before you go to the car dealership. With a pre-approved auto loan in hand, you'll be in a better position to negotiate for the lowest possible price on your car. By comparing various rates and fees, you should be able to find a much better rate than you would get at the dealership. The dealer may, of course, turn out to have the best rate available - but you'll never know that if you don't shop around first.

Dealers often post very attractive financing deals in their advertisements, but be wary of those highly-publicized offers. An advertised three percent interest rate may apply only to certain models on the dealer's lot, be only applicable for short-term loans of up to one year, or only be available to buyers with pristine credit ratings.

Auto loans are now available from a number of different banks and credit unions, and even a wide range of different online providers. No matter what rates you're offered, always try to negotiate for a better option. You may be surprised by the range of rates you find available, and by the willingness of various providers to compromise on rates and fees.

Compare Rates

While a small difference in the annual percentage rate may not seem all that significant for a short-term auto loan, consider the following. For a five year, $30,000 loan with an APR (Annual Percentage Rate) of five percent, your monthly payment will be $566.14. Raise that interest rate to 10 percent, and your monthly payment goes up to $637.41, a difference of $71.27 per month. It's not at all unusual to find two institutions in the same area offering rates that vary that widely.

When considering your options, don't just look at the annual percentage rate and monthly payments. The length of the loan itself is also a significant factor to keep in mind. A low monthly payment over a long period of time may actually be a far worse deal than a higher monthly payment over a shorter period, since your interest will continue to add up as you make payments.

If you can afford them, those higher payments will be a worthwhile investment. For the same five-year, $30,000 loan we mentioned, assuming an annual percentage rate of five percent, you'll have paid a total of $3,396.84 in interest alone by the time you pay off the loan. Pay that same loan off in three years, and your interest payments will total $2,368.68. Just by repaying the loan slightly faster, you'll have saved over a thousand dollars.

In addition, be sure to consider all additional costs that may be associated with a loan, including loan insurance, processing costs, and any penalties. Some institutions will charge a penalty or additional costs if you pay off the loan early. If possible, negotiate to eliminate those penalties - if you can afford to do so, you want to hold on to the option of eliminating your debt as quickly as possible.

Other Options

If you have bad credit or no credit, the interest rates available to you may be very high. If that's the case, consider asking a parent or relative to co-sign the loan agreement. Doing so will make them equally responsible for the loan, so you'll need to assure them that you will be able to make the monthly payments - but it's worth doing if it will ensure a significant savings on the interest rate.

If you own your home, you may want to consider using a home equity line of credit for financing instead of getting an auto loan. Using the equity in your home will give you a much better interest rate than you would get with an auto loan, and the interest on the loan will also be fully tax-deductible. In most cases, you can borrow as much as 75 percent of the value of your home: check with a loan specialist to determine your options.

One reason not to use a home equity loan is if you have any concerns whatsoever about being able to make the payments. No matter how beautiful that shiny new car may be, it's not worth putting your house at risk to get it. If you're at all concerned about making the payments, consider purchasing a less expensive car instead.

Protect Yourself

When you sign the loan agreement, make sure that you understand exactly what you're signing. Read the document in its entirety, and discuss the terms in detail with your loan professional to be sure that everything is clear. Ask questions if there's anything that you don't understand. An auto loan is a long-term commitment -- be sure to enter into the process with a thorough understanding of everything that you're agreeing to do.

Be clear about the annual percentage rate, the amount of the down payment, the number of payments and payment period involved, the amount of any finance charge, and any additional terms. In fact, it's best to clarify all of the details in any deal as early in the process as possible, so that you can be sure you're comparing apples to apples when you're deciding between various offers.

By checking your credit before you begin, then considering all of your options before you take out a loan, you can save literally thousands of dollars. Aside from a house, a car is likely to be one of the most expensive purchases you'll ever make. It's worth taking the time to enter the purchase process with as much information as possible.