Carmentary.com

We plan to purchase a car in the next few months. Though it will not be a brand new car (considering the depreciation value of cars), we will be getting a dealer-owned used car. We will have to get a loan for the car, which is a scary proposition. Both my husband and I always have paid cash for our cars, but we need something a little better quality in the next few months.

Searching for car loans has been an interesting experience, but I have learned a good deal about the process. First as with mortgages and signature loans, all car loans are not created equal. Our research has shown us time and again that getting a loan from a lending institution before going to the car lot is a great idea. That is because these institutions typically have higher standards but also have better terms.

In fact, buy here pay here car lots in a number of states have been the targets of lawsuits in recent years because these lots prey on people who have (or think they have) bad credit. These car lots promise that anyone can get a loan, and that is true, but many state officials are deciding that these lots do not give customers with good credit the interest rates promised.

Using your home bank, even if all you have there is a checking account, is a great way to get a better deal on a car loan. That is because the bank has an established relationship with you. They know that you have money there (and can see how much). If you have had the account for a while without any bounced checks or other problems, then you are ahead of the game with a good record at the lending institution.

Also check into what happens if you pay the loan off early. Penalties for repaying loans early once were a standard practice. In the world of mortgages, they have become anathema to buyers who want to get lower mortgage payments but reserve the right to repay early if their finances improve. In the world of car loans, however, these clauses may still exist. If you know that you will never pay a penny more than your minimum payment, then go ahead and forget about this clause.

If you think you may be able to make some additional payments or plan to pay extra in months when you can afford it, then check the fine print. Ask upfront if there are penalties for early repayment. Also ask what happens when you send in extra on your account. In some situations, the account actually rolls ahead. For example, if your payment is $200 a month, but you pay $225 this month, next month, you may only owe $175 for a full payment. That system, which is a little different from mortgages and credit card payments, may work for you, or it may be a pain. Either way you should understand the deal before you sign.

The interest rate, of course, is an important consideration for your car loan as is the monthly payment. You should have maximums that you will go on both ends to make sure that you are getting a car you can afford (and are willing to pay for). You may want something at no higher than 10 percent interest. While that may be doable, it could put your monthly minimums out of range because you will have less time to pay off the car. Make sure that you are able to negotiate with both the interest rate and the monthly payment so that you can get something that makes you happy.

Do not settle for a bad loan just because you love the car. It is best to know how much money you can get before you go shopping. Ask your bank for a pre-approval so that you will know your price range before you head out. Stay away from cars outside your price range. Car dealers count on you being excited about the best cars on the lot, but you cannot be tempted if you leave them alone. Once you get the finances figured out, sit back and enjoy the experience of purchasing a new car.