Key Takeaways:

  • Don’t learn your credit score from the car dealer.
  • You shopped for the car, so shop for the best financing, too.
  • A low monthly payment doesn’t mean you’re getting a great deal.

As home ownership rates continue to fall, it’s possible that many young consumers are years away from even thinking about taking on a mortgage.

A car loan, on the other hand, is often the first significant source of debt young people take on. Last year, Americans bought nearly 18 million cars, but only about 15 percent of those vehicles were bought with cash. That isn’t surprising since the average new car costs about $33,000 – most of us don’t have that kind of money saved for car purchases.

Unfortunately, car loans are becoming more of a burden for Americans. The average monthly payment on new car loans in this year’s second quarter was $499 – that was up from $483 a year earlier. What’s more, an increasing number of these loans are longer term, sometimes as much as seven years. A recent Fitch Ratings report found that among those customers with a credit score below 600, 17 percent were behind at least 60 days on their payments.

That suggests consumers need a solid strategy when considering an automobile loan. The following suggestions could help you stay out of the financial ditch.

Avoid credit-score surprises

As with other loans, customers with the best credit get the lowest interest rates. Check your credit report to make sure it’s accurate and that the liabilities listed are actually yours.

You can get a report for free every year from the three main credit-reporting agencies – TransUnion, Equifax and Experian.

You can also track your credit score through our credit-monitoring service, which lets you see your score along with the factors that are affecting it. If your score is on the low end, it could a good idea to delay your car purchase until you take steps to raise your score to improve your loan rates.

Shop around for rates

Just like you took time to find the best vehicle (right?), you should apply the same diligence to getting yourself the best loan terms. Too often, consumers finance their loans through the dealership because it’s convenient, which can often stick you with a higher rate than you actually qualify for.

Credit unions and community banks are often be the best place to start – and definitely check with the bank where you’re a regular customer. The auto dealer may still have the best rate, but at least you’ll be making the right choice.

Keep it short (if possible)

The term of the loan, that is. With car prices on the rise, the length of loans are getting longer, too. According to Experian Automotive, the six-year loan is now the most common length, making up more than 43 percent of new car financing. And one in four new loans take as long as seven years to repay.

Longer terms can give consumers the feeling that their loan is more manageable because the monthly payment is lower. But a difference of just two years in the length of the loan can mean you’re paying thousands of dollars more than the car’s overall cost.

In addition, a longer-term loan extends the time it takes for you to build up equity in your car, which could be a problem if it gets stolen or totaled in an accident, since your insurer will only pay for the value of the car, leaving you in the lurch to pay back the rest of the loan. If it’s early in the life of the loan, the insurance payment may not be enough to cover your entire balance.

Another idea: make a significant down payment, if possible.

Remember that rebates are part of the pitch

Car dealers will often tease a rebate or a lower rate for a new car, and it’s true that many of those deals can be enticing, particularly if dealers are near the end of their selling year and are trying to get rid of slow-moving inventory. But rebates aren’t perfect – they still depend on the terms of the offer and the price of the vehicle. You can use online calculators like the ones at Edmunds.com to see how good of a deal you’re getting.

Keep the monthly payment separate

Sure, you want your monthly payment to be manageable, but that’s not the same thing as getting a good deal.

Think of buying a new car as three different transactions: the price of the car, the value of any vehicle you’re trading in, and the financing.

Most financial experts suggest you keep each negotiation separate, especially if the salesperson asks how much you can afford to pay each month (HINT: they’re supposed to do that). Focusing on an artificially low monthly payment could cover up the fact that you’re paying too much for the car overall. This is another reason to check out pre-approved financing from a bank or credit union before you head to the dealership.

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Despite relatively low interest rates, car loans have become more expensive as vehicle prices rise and customers extend their loan terms to lower monthly payments. Doing your homework on financing options is a good first step to a great deal.

Check out our Tips for saving money on car insurance post for more car-related advice.