Whenever you finance a car, you have to consider not only the monthly payment, but also the total cost and car deals and loans. Here’s my advice:
1. Know your credit score before going to the dealer
If there’s ever a time to review and track your credit report and score, it’s before you get a car deals and loans.
Here’s the deal: Unlike a mortgage or credit card, you can usually get a car deals and loans even if you have poor credit – you just have to pay (a lot) more. The reason? If you don’t pay, it’s relatively easy for the bank to repossess the car.
But if your credit is poor, you might even be happy to get a loan, so you won’t want to ask if there’s a lower rate. Dealers know this, and they make a lot of money out of it.
Free tools such as Credit Karma can help you understand your Credit score. Once you know your credit score, you can determine if you’re eligible for the best auto loan rate.
Dealers often advertise high interest rates on new cars: 2.9 percent, 1.9 percent, sometimes even 0 percent. The fine text they left behind was that these rates were only available to the most creditworthy buyers, which could mean a FICO score of 750 or higher.
Buyers with credit scores below 700 can still get higher interest rates, but may not qualify for the best deals. Since then, rates have risen rapidly. Borrowers with below-average credit scores (below 650) may be eligible for auto loan interest rates of 10% or more.
The lower your credit score, the more important it is to shop around and make sure you’re getting the best rate your bank can offer you. Yes, you may have to pay more than a reputable person, but you may not have to pay the first fee someone provides.
2. If your credit is not satisfactory, please obtain a financing quote prior to departure
If you have good credit and know it, you can usually get the best financing rate from a dealer, who acts as a broker for multiple lenders.
Don’t have first-class credibility? Try an online lender. You complete the credit application and display your interest rate and the maximum amount you can spend on the car. The nice thing is, if the dealer offers you a better deal, you don’t have to use the loan, but at least you can walk through the door knowing you have an interest rate to beat.
As mentioned above, one of our favorite loan-matching services is Money. When we were considering working with them, we tried out their services and found that they offered the lowest-cost loan based on your individual needs and circumstances. You can read our review or give it a try.
In most cases, local banks and credit unions can offer the most competitive rates on old and new auto loans for borrowers with average loans. Even better, you can work with the dealer’s finance and insurance (F&I) manager to use the prearranged financing as leverage and get a lower interest rate.
3. Keep it as short as possible
The shorter the loan term, the lower the interest rate, but the higher the monthly payment. This is what you want.
When you walk into a dealership and offer to finance your car purchase, any savvy car salesman will try to negotiate with you based on your monthly payment rather than the overall purchase price of the car. That way, the sales rep can show you a smaller payment by extending the term of the loan rather than reducing the price of the car. Suddenly, a $470 car payment became a $350 car payment. However, you don’t have to pay less for it. In effect, you will pay more in interest.
The longer you wait to repay the loan, the more interest you will pay. But that’s not all. Many times, banks will charge higher interest rates for longer loans, further increasing your cost of credit.
Related: How to Pay Off a car deals and loans Early
Try to extend a car deals and loans for five or even six years to get a more comfortable monthly payment, but that means you’ll be paying more interest and will almost certainly be upside down for the entire life of the car.
4. Reduce it by 20%
In addition to taking out a short-term car deals and loans, you can put money down to avoid owing more than your car is worth.
This may seem easy enough, but many dealerships don’t even ask for any upfront payment from reputable buyers at all.
It’s tempting to drive without spending a dime, but there are risks. If you suddenly find yourself needing to sell a new car, you may not be able to do so if you owe more on the loan than the car is worth. A large upfront payment ensures that this does not happen.
5. Pay taxes, fees, and “extras” in cash
Do not fund miscellaneous expenses involved in purchasing a vehicle, such as sales tax, registration fees, documentation fees, and any additional expenses you choose to purchase, such as extended warranty.
Often, a trader will be happy to add some or all of these fees to your financing. Unfortunately, this will only ensure that you get off the car loan, at least temporarily, because you’re increasing the amount of the loan, not the value of the car that got the car deals and loans.