It is happening right now — a car buyer is arguing tooth-and-nail with the general manager of an auto dealership about the purchase price of a new vehicle. After spending a long time going back and forth that buyer might even get his way. The only problem is he’s likely to give all the money that he gained and more back to the dealership by blindly accepting the dealer’s financing. There are times when the financing offered by the dealer is the best you’re going to get. But just like almost every other product or service you buy, financing is worth shopping for. The difference in financing cost can easily amount to thousands of dollars over the course of a car loan. Here are the best tips to help you make a great deal on your car financing.
Know your credit score
You should not only know your credit score but actively work to cherish and enhance it. Simply put, your credit score is the most important factor in your overall car financing costs. If you have excellent credit, you will qualify for the best (read lowest) interest rate, and that keeps money in your wallet. If your credit is less than stellar you will have to settle for a higher interest rate, which means you will pay more. And if your credit score is marginal you might not even qualify for a car loan at all. (And if you have bad credit, that might not be such a bad thing.) Before you seek out a car loan, get a look at your credit score and scan your credit report to make certain there are no mistakes. If there are mistakes, like being called out for failure to pay a bill that you have paid, get that fixed before you apply for a loan.
Get a working knowledge of current interest rates
There are vast differences in the interest rates that individuals are charged in the automotive marketplace. Ironically, those who can afford to pay the highest rates are typically charged the least. Why? They are better credit risks, as exemplified by their credit score. For instance, a buyer with topnotch credit (score of 720 or higher) in today’s environment might qualify for a 3.0 percent new-car loan, while a credit-challenged buyer (score of below 600) might face a 14.0 percent interest rate. That means the car-buyer with poor credit will end up paying nearly five times more in interest to borrow the same amount of money for a new-vehicle purchase. You need to determine where you lie on this scale, and you can do quick, easy research by going online or calling your bank or credit union. If you have poor credit, you are well advised NOT to buy a car. If you need to purchase a vehicle try to get as inexpensive a vehicle as possible that will meet your needs.
Figure out the loan term
The interest rate is one key factor in the cost of your loan. The other is the “loan term,” in other words the length of the loan. Car loans are typically installment-payment loans in which you make a loan payment each month. Some of that payment is repayment of the principal (the amount you borrowed), and the other is interest — the additional cost you pay to have use of that money. If you seek to pay the least amount in interest, you should seek the shortest loan term for which you can reasonably make the payments. For example, if you borrow $25,000 over 36 months at 4.0 percent interest you will pay about $1200 less over the course of the loan than if you repaid over 72 months. (The downside is that your monthly payment will be twice as high in the 36-month loan.) It is very helpful to get this all figured out BEFORE you enter the dealership. A car dealer’s showroom is a very high-stress place to make these important financial decisions.
Okay, you’ve got the basics — your credit score, an idea of the market interest rates and the loan term you’re comfortable with. Now it’s time to shop actively for the right car loan. There are a lot of places to look — your local bank, your credit union and, of course, on-line. Some on-line sites, like bankrate.com and LendingTree.com enable you to get offers from several potential lenders. Big banks like CapitalOne, Chase, Bank of America, Wells Fargo and Citi are other potential sources of loans. Each lending institution has its own policies, so you might find one offers you significantly better terms than does another. That’s why you shop.
Seek financing discounts
As part of your loan shopping process, look for special discounts that could end up saving you considerable amounts of money. For example, some financial institutions will lower your interest rate if you agree that the monthly payment will be automatically drawn from your checking account. This, of course, will require you to maintain a sufficient balance in the account to enable the withdrawal to be made each month. A credit union might give you a better rate if you currently have an account with them. Or if you open one.
Pre-qualify for a loan
Once you have landed on a lending institution that you think will fill the bill for you — acceptable interest rate and loan duration — it is time to “pre-qualify.” That means you submit the information necessary to obtain loan approval before you have a car purchase deal in place. Typically you can pre-qualify for a new-car loan at a specified dollar amount (e.g. $25,000) that will enable you to purchase a new vehicle. By essentially getting loan approval prior to visiting the dealership you can take one worry off your shoulders (will I qualify for a loan?); you’ll have a very good idea what your monthly payments will be and, very importantly, you’ll have a great tool to judge the dealer’s financing offer.
Use your leverage
By now you’ve done everything right. You know your credit score. You understand the interest rates that are currently available. And you have pre-qualified for a loan, so you know you are dealing from strength. Now take that knowledge to get yourself a good deal. Let the dealer know you are pre-qualified, but tell him you are quite willing to see what the dealership has to offer in terms of financing. Depending upon the model and trim level, a low- or even zero-percent financing deal might be available through the car manufacturer’s finance arm. If there is an either/or offer of a zero-percent loan or a cash-back promotion, do the math on both to decide which will work better for you. The good news for you is by pre-qualifying you will have choices, and you will be prepared to examine them rationally rather simply agreeing and hoping.
And that’s exactly the best way to get a great car deal.
by Tom Ripley for Driving Today