Getting the Best Deal on New Auto Financing
by Gary Foreman
Sure you want a good deal on your new car, but a good deal on your financing can save you even more. Take these steps to get the best deal on new auto financing.
Naturally, you want to get the best price from the dealer when buying a new car. But, unless you are paying cash for the car, finding the best auto loan could reduce the cost of the car by up to 5%.
So how can you find the best financing? Let’s examine some strategies and pitfalls.
Start with a copy of your credit report
Before you even shop for a loan, it’s wise to get a copy of your credit report. If there are errors on the report, cleaning them up before applying for a loan will save money. Remember, the interest rate you pay will be directly related to your credit history. (See Disputing and Correcting Credit Report Errors.)
Shop for a loan before shopping for a new car
Once you have reviewed your credit report, it’s time to shop for a loan. Your local credit union or bank is likely to have a better financing offer than the dealership. And, don’t forget to compare online rates. Many are even lower than brick & mortar locations. Bottom line? Start looking for a loan before you ever set foot in a dealership.
There’s another reason to shop for a loan before shopping for a car. The signed deal to buy the car isn’t really complete. It probably includes a “subject to financing” clause. That means that you haven’t really bought the car until you arrange financing.
So you could be sitting in the dealership dreaming of that new cruiser. Then the dealer discovers that you don’t qualify for the low rate that they’ve quoted you. Will you be willing to walk away from your dream car for ‘a few dollars more each month’? The dealer counts on the answer being ‘no’.
Avoid the problem by starting the loan shopping at your bank. Tell them how much you’d like to spend on a car. They’ll check your credit. After that they’ll propose an interest rate and what your payments would be. Have the interest quoted to you as an Annual Percentage Rate (APR) so that you can compare offers. Both online and off.
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Don’t get hung up on getting the cheapest monthly payment…
Write out a list of questions to ask the loan officer. This isn’t a simple document. Some seemingly minor clauses can be expensive later. For instance, find out what happens if you want to pay the loan off early. (See What To Know About Auto Loan Prepayment Penalties.)
Once your questions are answered it’s time to negotiate. Many financial sites list the rates charged by different banks and credit unions for auto loans. Ask your bank if they’ll match the lowest rate on the list.
And don’t concentrate on getting the cheapest monthly payment. Sure, you need to know that the payment is affordable. But a lower payment could hide the fact that you’re actually paying more for the loan because you’ll be paying for a longer time.
…But do get the lowest APR possible
Your goal should be to get the lowest APR. On a 48-month $25,000 loan, a 2% difference in APR will cost you an extra $24 each month. That’s a difference of $1,142 over four years. And, depending on your credit history, rates can vary by 3 or even 4%. That’s a lot of money to give away.
Make sure that you know how many payments you’ll make. Remember that a loan can cost more even if the monthly payments are the same. All they need to do is to make the loan last longer.
Don’t forget to check out any credit unions that are available to you. Often their rates are cheaper than banks.
Avoid balloon payments…
They’re a disaster waiting to happen. Sure they’ll lower your payments now. But if you can’t afford a higher payment now, where will you get the money to make the bigger balloon payment later?
…and try to avoid Credit Life Insurance
Credit insurance is not required by federal law. And it’s very expensive life insurance. Negotiate with the lender. Some may require it. But, if your credit history is good, you can always look for a lender that’s more flexible. (See Do You Need Credit Life Insurance When Buying a New Car?)
Consider these two popular financing methods
There are two other popular methods of financing cars to consider other than banks or credit unions.
Some homeowners choose to borrow against the equity in their house and use that money to buy a car. And, generally, a home equity loan carries a lower APR than a car loan. But, it’s important to repay the loan in a timely manner. Remember, you can’t borrow $25,000 against your home every four years without paying it back.
Another option is to tap into your 401k retirement plan. Many 401k plans will allow you to borrow to buy a car. This can be a good idea, but you do need to be careful.
First, some plans require you to completely repay any loans if you leave your job or are laid off. Second, you might find that you’re not allowed to contribute while you have a loan outstanding. That could significantly effect the size of your retirement nest egg. Take the time to ask questions before you borrow the money. Making a mistake with your retirement plan could be very expensive. (See Can I Save Using a 401k Loan to Buy a Car?)
Know what you’re signing – both before and after
Read every paper before you sign it. And, if you don’t understand it, ask for an explanation. If you don’t understand the explanation, ask for a copy of the document that you can take to a professional or trusted friend for help.
Make sure that the finance papers look the same after they come back from the credit manager. It’s not uncommon for them to change the interest rate. And sometimes they conveniently forget to mention that fact to the buyer.
Now, it’s finally time to shop for the actual car
Once you’ve found good financing, it’s time to find a car you like and negotiate a price with the dealer. Then you can see what financing they have available. That puts the dealer in the position of having to match the well-shopped financing that you’ve already arranged.
Generally, dealers don’t actually loan you the money to buy your car. They sell the loan for a bank or finance company. And they’re paid based on how high the interest rate is. The more you pay, the more they make. Perhaps they’ll have something better. If so, great. If not, you won’t find yourself stuck with overpriced dealer financing.
You have two opportunities to save when buying a new vehicle: the financing and the actual car purchase. We hope that you take advantage of both of them.
Reviewed August 2022
About the Author
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.
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