Best Practices, How to Shop for A Car Loan

When you shop for a car it takes time, whether you shop online or visit dealerships.  In the end you’ll likely still go to several dealerships, test drive several cars, make your final selection and then negotiate the price.  The question is…are you as diligent when you shop for financing for that new or used car?

Your credit has an impact on the interest rates you will pay as well as down payment requirements.  The preference should be to pay in cash, but most of us aren’t wealthy, so we need to find the best deal on a loan.

There are many choices for financing such as banks, credit unions, auto finance companies and the captives.  There are many things to consider when you are financing a car: the price of the vehicle, monthly payment, terms or length of the loan, annual percentage rate or APR, down payments, additional fees, and penalties for paying it off early.

You need to shop around for a loan prior to going to the dealership to purchase a car and do your homework ahead of time.  If you already know the APR, terms, and additional fees, you can make comparisons.  It is best to know the rate you qualify for with other lenders, so you can negotiate with the dealer.  You want to be in the driver’s seat, so to speak.  SECRET – You’ll almost always get the best deal from the captive lending arm of the manufacturer (Ford Motor Credit, GMAC, Toyota Finance, etc etc).  They can afford to be more aggressive because they’re in support of the brand and they know that there’s already margin profit when they move a car off the lot.

How do you do this?  There are online sites and tools to help you shop for rates, and you can also contact your credit union or bank.  What do you compare? Look at the total amount you are paying for the car over the term of the loan. The longer term loans with lower monthly payments usually cost you more. They may be attractive but you need to do the math.  If you can afford higher monthly payments then a shorter term loan is going to save you money because you’ll be paying less interest.

Keep the following in mind…

Price of the vehicle – The price has a major impact on your payments and the higher the price you pay, the higher the monthly payment. This is very important and you need to keep this is perspective.  Beat the dealer up on price as much as you can.  Be prepared to walk away, and do so if they won’t come to your price point.  And, the end of the month is usually a better time to negotiate because the salespeople have quotas that they have meet each month.

APR and length of loan – Annual percentage rate (APR) is the interest rate you pay on an annual basis.  APR is also quoted with the number of months of the loan.  This is the best gauge for comparison purposes when you are loan shopping. For example a car loan of $25,000 at interest rate of 4.38% has the following options:

Time               monthly payment     total amount             interest paid

36 mo.           $742                           $26,724                     $1,724

48 mo.           $568                           $27,300                     $2,300

60 mo.           $465                           $27,883                     $2,883

You need to be aware of the amount of interest you are paying. In this example, the longer the loan, the more you pay in interest. In three years, you pay $1,724 in interest or $2,883 in five years.

Penalties for paying it off early – You need to review the terms of the loans for penalties. Some lenders require full payment of the total interest charges and won’t reduce them for early paying off. Others may charge a set penalty such as a certain number of month’s worth of interest.  They don’t incent you to pay early; they still want the same profit from the loan.  Walk away from these loan offers.  They’re terrible.

Take the time to research your options before you get a car loan, it can really save you money.   You need to keep in mind your budget and what you can afford.  Buy one or two levels below what you WANT.  A car is possibly the worst investment you’ll ever make because it’s an expensive depreciating asset.  Don’t compound it by over paying for a car.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Uncategorized

This post was written by John Ulzheimer