How to get the Best Financing on Your Next Car
Getting the best deal on automobile financing doesn’t mean accepting the seller’s first offer. To make sure you get the lowest possible interest rate, good dealer incentives, and a monthly payment that works well for you, you will have to do a little legwork—but the effort could save you thousands of dollars.
Check your credit report and make necessary improvements
Before you shop for a loan, first obtain your credit reports from each of the three major credit-reporting agencies (Experian, TransUnion, and Equifax). Dispute any erroneous information, pay old debts, reduce your unsecured balances, and close accounts you don’t need or use. Building up your credit enough to see an improvement in your credit score takes time, but it can make a tremendous difference in the deal you are offered.
Bring your own credit report with you
If you plan on using dealer financing, take your own credit report to the dealership. The salesperson may still access one, but having your own can thwart being denied the best rate because your credit isn’t good enough – when it actually is.
Make sure the report is current (within the last 30 days) and that it is complete with a FICO score (a number ranging from 300 to 850 that is generated by the Fair, Isaac & Company that helps lenders assess lending risk). The higher your score, the greater chance you will qualify for the best financing deals.
Consider a co-signer – carefully
If you have less than perfect credit, you may consider having someone with good credit co-sign the loan for you so you can get a better deal than you would on your own. Be cautious when using this option. The co-signer assumes equal responsibility for the repayment of the loan and any late or missed payments will appear on both of your credit reports.
Shop for the best deal
The total amount you will pay for your car depends on its price, the annual percentage rate (APR), and the length of the loan. Shop around and compare offers. Search the Internet and call various lenders. Rates at your local financial institution are frequently better than what you would get at a dealership, and you won’t have to worry about being “scammed.” If you come to the dealership with your financing pre-approved elsewhere, then all you have to worry about is getting a good deal on the price of the vehicle (you’re only asking the dealership for one “favor”). However, if you also need financing (two “favors”), then the dealership will have more leverage because then they can choose to give you a good deal on the financing but not such a good deal on the price of the vehicle or vice-versa.
If you choose to go with dealer financing (where the dealership shops for loans for you), be sure to ask about manufacturer’s incentives, reduced finance rates, and cash back on specific car models.
Lastly, remember that if you are in the market for a vehicle loan, try to rate shop and compare with as many lenders as possible within a 14 or 45-day window (dependent on the FICO score model being used by the lender) as it will only count as one hard inquiry for credit score purposes.
Financing offers can be tricky
Don’t be fooled by an advertised low monthly payment. If the length of the loan is long and the interest rate high, you will be paying more than you may have to. And be wary of extremely low promotional APRs. Though you may qualify for particularly low rates by making a large down payment, it may be more affordable to pay higher financing charges on a car that is lower in price or to buy a car that requires a smaller down payment.
Beware zero percent financing
Zero percent financing sounds like an amazing bargain – after all, how can you beat a no interest loan? You can. Such “deals” often come with inflated prices for extended warranties and loan insurance, high application fees, and pre-payment penalties. And because you forfeit the rebate option, you end up paying a higher price for the car.
Though you may not have to pay interest on the first half of the loan, you could be charged interest on the remainder – and have to pay it first. This is called “front loaded” interest. You may also be required to repay the car in three years or fewer – resulting in a very high monthly payment. Consider the example:
- $20,000 loan 0 % financing for 3 years = $555 per month
- $20,000 loan 3.9 % financing for 5 years = $367.43 per month
Zero percent financing can be elusive. It is only offered to those with very good credit, which is determined by the lender. And it is often not available for the most popular cars and trucks.
Though zero percent financing can be an economical way to buy a car, very often you will pay less over all and have a more manageable payment by negotiating the price down and paying a reasonable amount of interest instead.
Read and understand your loan document
Finally, before you sign any document, make sure you read the loan document carefully. Be sure you understand and agree to the:
- Exact price you’re paying for the vehicle
- Amount you’re financing
- Finance charge
- Number and amount of payments
- Total sales price
Is it worth it to take the time to build your credit, learn about the lending process, shop around, compare rates, and negotiate? If you want to save a lot of money, the answer is an unequivocal “yes.” By doing so, you can drive away secure with the knowledge that you received the best deal possible.
Revised January 2016.