If you’re a first-time car buyer, then shopping for a car can be exciting, especially when it’s new. A new car is one of the largest purchases you will make and it’s important to understand how car financing works. Here are some ways to finance your new car.

Understand Your Credit Score

A credit score is an analytical number that calculates your creditworthiness based on your credit history. Your credit score runs from 350 to 850 and the interest rate for a car loan depends on your credit score. The higher your credit score, the lower your interest rate. Also, you could be eligible for additional financing offers such as cash back from manufacturers. When lenders look at your credit score, they’re viewing a snapshot of your creditworthiness and they use that information as a tool to foretell the chance that you will repay the loan based on your payment terms. Not only will lenders look at your credit score, but they will also look at your credit report to check your debt-to-income ratio to determine what your interest rate should be.

Get Pre-Approved

Getting pre-approved puts you in a stronger negotiating position and helps you set a realistic budget to get the best interest rate possible. Preapproval makes you a “cash buyer” at the dealership, a much stronger negotiating position. Keeping the loan process separate allows you to focus on the real price of the car. Also, knowing how much you can afford makes the visit to the dealership much less stressful.

Correct Your Credit History

You’re entitled to one free report of your credit history from all three credit bureaus once a year. Keep in mind that your credit score is not affected when you check your own credit. Prior to entering the dealership, you should already have your credit information and be taking steps necessary to raise your score or fix any errors. If you get approved for a loan with bad credit, you will likely have a higher interest rate. Fortunately, you can apply for refinancing later once your credit improves.

Use Cash to Pay for Fees and Taxes

Taxes and any other fees or warranties should not be included in your financing. Adding these extras into your financing could potentially cause your loan to be upside down. Remember, since cars depreciate, doing this would increase the amount of the loan, but not the car’s value.

Put in a Good Down Payment

You can avoid the pitfall of being upside down on your car loan by putting a decent amount of money down. The average amount to put down is 20 percent and that can help keep your payments within your budget. If you have good credit, it’s tempting to want to drive out of the dealership without putting in a down payment, but don’t fall for the no money down deal.