You can save a sack of cash when you look for auto financing if you follow a few simple rules. You start by knowing your credit score and understanding how loan offers work through dealerships and for vehicles you buy through private sellers. The basic rules are that you should put down as much money as you can afford and keep the loan term as short as possible.
It’s also key to keep in mind that you’ll need to take into account the cost of auto financing in the total price and to have a grip on what it will cost you to insure your new ride.
Say you head to the dealership and you start checking out the “sticker price” of your favorites. You also need to know the “dealer’s invoice price”. That’s the price the dealer paid for the car, and that generally runs about $1,500. Depending on the time of year and month, you may be able to negotiate a cut of up to $1,000 or more on the price.
Here’s some boilerplate: when you finance a car for four years at 6% (with nothing down), you’ll pay something like $2,000 in interest. Let’s say you change the term to financing the car for just three years at 4% with a $1,500 down payment. That will save you more than $1,000 over the term of the loan.
It’s also key to do some shopping when it comes to the the rates and terms of your financing. Don’t until the moment you’re sitting down with the dealer to consider your financing.
Keep in mind that a car is not an investment, but rather a liability as cars depreciate big time the minute you drive them away from the lot. In nearly all cases, a car depreciates quickly and the value of that car drops faster than you can pay off the loan. That’s what’s known as being “upside down” or “under water” on your loan, and you don’t need that kind of aggravation.
How Much Car You Can Afford
- Are you financing or paying cash?
- Know the details of your credit score – before you visit a dealership
- Double check any credit reports and scores – before you shop for your car and your car loan
- Understand that your car is likely not an asset over the long haul
Car loans are generally pretty easy to come by – unlike mortgages or credit cards – you can usually get a car loan with crappy credit scores. You’ll pay a lot more in interest if your credit is bad. So why do sellers and lenders hand over the money to those with bad credit? It’s a relatively simple matter for a bank to repossess a car if you don’t pay, and they can at least recover some of their loan proceed losses. I know your shaky credit might lead you to avoid asking if there’s a lower rate available, but do it. It’s a fact that dealers will exploit whatever advantages they see to make a larger profit.
While dealerships advertise too good to be true interest rates on new cars (2.9%, 1.9%, sometimes even 0%) those rates are only available to buyers with topflight credit. To get approved for those rates, you’ll need a FICO or Experian score of 750 or higher. While you can get decent terms with scores in the low 700s, you won’t be eligible for the best promotions. When your scores a lower, rates ramp up fast. If your stuck with below average credit scores, say under 650, expect to pay rates of 10% or higher.
The lower your credit score, the more more you have to gain by shopping for the best rate a bank can offer you.
- If your credit is shaky, check out financing options before you shop
- If your credit is excellent, dealership financing options may work as dealers serve as brokers for many lenders
If you have rocky credit, try a variety of online lenders. Once you fill out a credit application and see various interest rates and maximum loan amounts, you’ll have some leverage you can use when you visit a dealer. It helps your bargaining position if you know that you have a baseline interest rate a dealer must beat.
Local banks and credit unions often offer borrowers with solid or average credit competitive interest rates on both new and used car loans. If you handle the process correctly, you may be able to use your research on financing as a bargaining chip with the dealership’s finance and insurance manager. Do this and you may be able to score a lower interest rate.
Keep the term of the loan as short as possible
Shorter loan terms always come with lower interest rates, though the monthly payments may be higher.
Savvy car salespersons will attempt to negotiate with you on the basis of a monthly payment, not on the overall purchase price of the car. In doing this, a sales rep will hope to make lower payments attractive, and they often do this by extending the the term of a loan, and rarely by reducing the total price of a car or truck. While a $450 a month car payment which becomes a $350 monthly car payment seems like a better deal, you’re not paying any less for the car and you’ll be paying much, much more in interest.
The longer the terms for a car note, the more interest you’ll pay and banks will also charge higher interest rates for longer loan terms. That means your “cost of credit” goes up as well.
While you may be tempted to stretch out your auto loan to five or six years to knock down the monthly payment, keep in mind that you’ll pay much more in interest. It also means you’ll end the term of the loan upside down on your car. That’s never ideal.
Laying 20% down in cash makes sense
While you want a short loan term, you can keep from owing more money than the car is worth by putting some money down. Some dealerships don’t require buyers with good credit to make any down payment at all. Don’t enter that trap. While it may be tempting to drive off the lot in a new car without putting a penny down, keep in mind the risk involved. Should you find yourself in need of selling your new car in an emergency, you won’t be able sell it at all if you owe more on the loan than the car is worth.
Make sure to pay all taxes, fees and additional charges with cash
And give serious consideration to paying for add ons such as extended warranties. Dealers will roll some – or all – of these fees into your financing, but doing so nearly guarantees you’ll find yourself upside down on your car loan at some point. You’re increasing the amount of your loan – but not the value of the car – when securing a loan loaded up with fees.
Additional considerations when financing your car
Gap insurance (guaranteed auto protection insurance) is sold by car dealers and lenders, and it covers the “gap” between what an insurance company thinks your car is worth and what you owe on your car should an accident occur and the insurer declares the car a total loss. With no gap insurance in effect, your insurer pays only the book value for the car – without regard to what you owe on any loans. Say you’re in a crash and you still owe $12,000 on a loan: an insurance company may decide to pay out just the $10,000 “book value” of your car. In this situation you’re still on the hook for responsible paying back the $2,000 “gap”. If you structure your car loan with money down and a three-year term, you may not need gap insurance.
When to refinance a car loan
If you get stuck with a bad car loan, if your credit is good – and your car isn’t too ancient or unattractive to buyers – you may be able to refinance your car loan in the same way you might refinance a mortgage. It’s often simple to find auto loan refinancing quotes online, and with no obligation. Your local credit union can some to the rescue if you wish to check out options for refinancing a bad car loan.
It’s important to consider fees for applying or closing the loan, and you may want to skip lenders who simply want to lower your monthly payment by extending the term of a loan. An auto refinance should net you a lower interest rate and help you pay down the total owed over a shorter term.