Car Buying and Credit

Car financing is a type of installment loan, meaning that you borrow a set amount and pay it back in equal payments spread out over a specific time period. You can get credit on your own or with the dealership's help. You must choose your financing carefully to get the best deal rather than relying on the dealer, according to Edmunds editor Warren Clarke.

Pre-approval

Dealers have finance departments to help you find car loans, but Consumer Reports recommends looking for credit on your own before car shopping. Banks, credit unions and online lenders all offer competitive car loan rates and will give you pre-approval if your credit rating is good enough to qualify.

Negotiations

Never include financing in your negotiations when buying a car, Consumer Reports warns. Salespeople often present car prices in terms of monthly payments, disguising the true cost. Explain that you are only interested in the out-the-door price and will deal with the loan separately. Leave the dealership and go to another one if the salesperson resists.

Special Financing

Car manufacturers sometimes offer special financing. Interest can be as low as 1 percent or even 0 percent if you have an excellent credit rating. These specials usually require you to forfeit any rebate. Compare the cost of keeping your pre-appproved loan and taking the rebate with skipping the cash back and getting the promotional loan rate instead. Auto research websites, such as Edmunds, have online calculators to help you compare your options.

Considerations

Prepare yourself for car buying by checking your Experian, Equifax and TransUnion credit reports before seeking loan pre-approval. The Fair Credit Reporting Act entitles you to a free report from each bureau annually. The Federal Trade Commission advises that these no-cost reports are only available through AnnualCreditReport.com. You can buy reports or get free ones by buying services or memberships directly through the credit bureau websites. Your vehicle financing power is reduced if the reports are riddled with negative items. Dispute any errors you notice with the forms provided on the bureaus' websites. The FTC explains that the bureaus are legally obligated to investigate and make corrections within 30 days of notification. Your ability to get a loan is improved if negative entries are fixed or erased.

Bad Credit

You will end up paying a high interest rate for your car loan if your credit rating is bad. Edmunds editor Clarke recommends refinancing the loan within two or three years if you improve your credit rating in the meantime. You can probably find a bank, credit union or finance company that will refinance you at a better rate if you build up a timely payment history on your existing loan and other bills.