1. Assess your financial situation by creating a monthly budget. If you’re not sure how to do this, seek help from a non-profit credit counselor.

• Add up all of your fixed expenses (rent/mortgage, utilities, phone and other recurring monthly bills, savings, child support payments, insurance premiums, and any existing loans including outstanding credit card debt).
• Then add up your estimated additional expenses – for food, gas, entertainment, emergencies and unexpected expenses, and whatever else is not a set monthly expense.
• If you didn’t have a car before, don’t forget you’ll also have to pay for car insurance, maintenance, and registration. Shop around for car insurance before you shop for a car, to get a sense of how that will affect your budget.
• If you will be trading in a car but still owe money on it, be sure to find out how much you will need to budget for paying off that loan and add that amount as well to the expense column.
• Subtract all expenses from your take-home pay and any other income you receive on a regular monthly basis.
• What is left is the amount you have to make monthly payments on a car loan or lease.

2. Review your credit.

One of the first things you should do before applying for an auto loan is review your credit report at one or all of the largest consumer reporting agencies – Equifax, TransUnion, and Experian. You are entitled to a free copy of your credit report  from each of these agencies every 12 months, and you should request it at annualcreditreport.com.

Review your credit report and dispute any errors  that you find. A serious negative error on your credit report could affect the interest rate you get for a car loan and end up costing you thousands of dollars.

Any negative information on your credit report (such as late payments, delinquencies, settlements, or bankruptcy filings) will influence your ability to obtain a loan or to obtain one at a low interest rate.

TIP: Many types of accurate, negative information on your credit report must be removed after seven years. If you find a negative item on your report that is over seven years old you should dispute it.

3. Save for a down payment.

It’s important to know how much you can afford to spend on a down payment before you call around for loan quotes or go to a dealer. This will help you understand what cars you can afford.  Also, if you are able to offer a solid down payment on a car, you will be in a better position to negotiate the final sale price of the vehicle as well as the terms of your loan.

4. Research loan options and consider getting prequalified or preapproved for a loan.

It’s a good idea to shop around for a loan before heading to a dealer. You may want to consider getting prequalified or preapproved for an auto loan from a bank or credit union  before visiting an auto dealer.

You should know, though, that asking for quotes from multiple lenders could have a negative impact on your credit score. For most people, any negative effect will be small while the benefits of shopping around could be significant. Concentrating your applications in a short period of time can minimize the effect on your score. And knowing that you have loan options will help you negotiate the best overall deal.

When you are offered different loans, compare all the terms. You should be looking not just at the monthly payment you’ll have to make (and whether you’ll be able to make it given your budget ), but also at the interest rate you’re being offered and the length of the loan. A higher rate or a longer term will result in additional interest costs for your loan.

Don’t forget to read the fine print of any loan contract. For instance, some loans have a “prepayment penalty,” which means that you will have to pay a penalty if you pay off your loan before the end of the loan term. Even if you’re not planning to pay off your loan before the end of the term, you may want to avoid loans that have a prepayment penalty in case your situation changes.