Auto loans can be tricky to understand and negotiate until you learn some very basic facts about the process. For many people, a lack of information is the biggest obstacle to getting a fair deal on a loan for a new or used automobile.

Making a fully informed automobile purchase using an auto loan is a process that includes knowing what interest rates are available from a variety of sources, knowing how your current credit rating may affect your chances, how much you will pay each month with or without a down payment and how much your loan will actually cost.

Here are five important things you should consider before agreeing to a new auto loan:

Know your credit rating

Applying for an auto loan is like any other type of credit application; you should present yourself as an acceptable credit risk and adjust your creditworthiness to be more attractive to a lender. This means taking a detailed look at your credit report and starting this process as early as possible.

Repeated requests for credit can hurt your rating, so at least six months (preferably a year) before applying for a new loan, avoid applying for new credit cards or other types of credit. You should also avoid applying for multiple loans in a short amount of time.

Some people don't understand the nature of their credit rating until they actually go to apply for the loan and find themselves rejected or approved only at a higher interest rate. This hurts you when you reapply for the loan later because repeated applications can negatively affect your credit score. Know your credit rating before you apply.

Know your interest rates and options

Do you know what auto loan options and interest rates are available? Do you know what is considered a good interest rate on an auto loan as opposed to a poor rate?

Some people mistakenly accept the first loan amount and interest rate they are approved for, but it's best to shop around. While your credit rating and employment history are important factors in what kind of terms you may get, there are other issues that can play a role.

Is your lender a bank or an auto finance company? Will you get a better rate on a short-term loan? What kind of interest rate do you get at your current bank versus a different lender eager to accept new customers?

Finance companies vs. banks

Your auto loan options usually include a financing offer by the car dealer. A dealer offering you "in-house" financing may be giving you second chance financing or the convenience of one-stop shopping for both the vehicle and the auto loan, but it's important to compare the terms of such a deal to what your current bank might offer.

You may find the terms of an auto loan from your current financial institution are more favorable. If you can get a better deal with in-house financing at a dealership, take it, but always make an informed choice. As always, your credit and employment history may affect the terms of your loan.

Lower your monthly payments

Regardless where your auto loan comes from, you can lower your monthly payments with a larger down payment. Some dealers don't require any money down, while some ask for ten percent or a specific dollar amount. If you can afford to pay more up front, you will appreciate the lower monthly payments.

You can also lower your payment further by passing on add-ons such as extended warranties, undercoating and rustproof treatments or other options. If you feel you don't need such amenities, don't pay for them. Cut out the extras and save some extra money.

Short-term vs. long-term loans

A 36-month auto loan may give you lower monthly payments, but the actual cost of the loan is higher. This is because of the interest accrual over the additional time. A 24-month loan is simply cheaper than a longer loan.

It's important to decide what your priorities are in this area—lower payments at the expense of a longer commitment, or higher payments in a shorter time frame.

Some people need the lower monthly bills and don't mind the extra payments, but if you'd rather get out of debt quickly, consider the shortest terms you can afford.

See also: Auto loan calculators