How to Get a Car Loan in a Credit Crisis

By Dawn Handschuh, Personal Finance Writer   

Car dealers are eager to make a deal with buyers these days, but tightening credit means you'll need better credit and a bigger down payment to drive that vehicle home.

Incentives and discounts abound.

Cash may be king now, but most consumers don't have enough for a new car. So before you go for a test drive, take these steps to secure the financing you need despite higher lending standards.

Borrower, Know Thy Credit
It can't be over-emphasized ⎯ order your credit report and score before car shopping. Ideally, you'll have at least a few months to build a stronger credit history (if you need to) before any purchase. 

According to Edmunds.com, banks, credit unions and car dealers rank borrowers based on their credit score into four tiers. The most desirable, Tier 1, is for borrowers with credit scores of 720 and up. In this category, the average cost of a 4-year loan would be 5.95% at a credit union, 6.14% at a dealership and 6.5% at a bank.

Borrowers with scores between 700 and 719 fall into Tier 2, with slightly higher rates. Borrowers with scores between 670 and 699 fall into Tier 3 and those with scores between 630 and 669 fall in Tier 4, where the average 4-year car loan would cost 8.95% at a credit union, 9.44% at the dealer and 10.99% at a bank.

Cough Up More Cash
Unless you're in the top tier, be prepared to put down a higher down payment ⎯ about 10% more than last year. (A trade-in makes things easier.) In fact, if you're a subprime borrower and you can manage  30% (or more) down, you may qualify for Tier 1 rates. Still, even those with decent credit will need a 10% to 15% down payment.

Get Pre-Qualified
Lock down financing first; if you pick out the car beforehand, you may cave in to a mediocre deal just to get the car home. Shop around for a good rate online, or turn to smaller, local banks, many of which avoided the subprime loan debacle. Being pre-approved gives you greater leverage to negotiate at the dealership.

Forget the 6-Year Term
Stretching out loan payments for six or seven years is what led many car owners to be "upside down," meaning, they owed more on their car than it was worth.

These days, expect no more than a five-year term.

It's a great time to buy a car. But only if you really need one.