PITFALL #1: Many consumers don't know what their credit rating is when they apply for an auto loan. The strength of their credit score largely determines what kind of interest rate they will receive. Therefore, it's critical to make sure your credit report is in the best shape possible before shopping for a car.
SOLUTION: Order a copy of your credit report and look for items that may stand in the way of you getting a good rate. Correct any issues or errors promptly. Are all of your lines of credit in good standing? Are there any signs of identity theft? The credit bureaus will tell you how to correct errors when they send you the report. The following numbers and Web site addresses will assist you in checking your credit.
Equifax: 800-685-1111, www.equifax.com
Experian: 888-397-3742, www.experian.com
TransUnion: 800-916-8800, www.transunion.com
For more about credit scores, see "Understand Your Credit Report."
PITFALL #2: Many consumers are tempted to overspend once they get to the dealership.
SOLUTION: It's a good idea to set a sensible price range for the car you want to buy and stick with it. Experts suggest that monthly car payments and related expenses should not exceed about 20 percent of your monthly net income. You can even bring a printout of your budget to the dealership as a reminder. And we always recommend bringing printouts of True Market Value prices to use as a guide when negotiating.
PITFALL #3: Most consumers arrive at the dealership without having researched the current interest rates being offered in the marketplace, so they have no idea if they're being offered a competitive rate.
SOLUTION: Use the Internet as a research tool to compare rates. Check out Web sites like bankrate.com for national averages, and the Web site of your own financial institution.
PITFALL #4: Most consumers arrive at the dealership without approved auto financing in hand. This is either because they are not aware of all the financing options available, or they assume they will qualify for a low rate at the dealer. This approach deprives the consumer of bargaining power when it comes to negotiating the lowest possible interest rate.
SOLUTION: Become an "empowered buyer" by getting a no-obligation loan before visiting the dealership. Having your own loan could save you significant money. For example, a 60-month $26,000 loan at 4.49 percent can save the consumer about $1,500 over the life of the loan, compared to a loan at 6.56 percent.
PITFALL #5: Many dealers offer a choice between discounted (or zero-percent) financing or a rebate but not both. Consumers may erroneously assume that the zero-percent loan will deliver the most savings.
SOLUTION: Sometimes it's better to take the cash rebate and apply it against the purchase price of the vehicle and then use your own preapproved car loan to finance the vehicle. The savings chart below shows how a low-interest rate and a rebate can "beat" a zero-percent deal.