Jean Chatzky
Do one thing: Before you let a car dealer provide financing, check out the loan rates for new and used automobiles at your local credit union or bank. Often, that’s where the best deals are.
For many people, buying a new or used automobile can be a nerve-wracking experience. There are high-pressure sales tactics, questionable dealer add-on expenses, and extended warranty offers that can leave potential buyers confused and often overwhelmed.
Then there’s the financing — in other words, the auto loan.
Unfortunately, many people don’t realize there should be two distinct parts to the car-buying process (three, if you are trying to get the best possible price for your trade-in). You should do your research to find the make and model you want, determine if you are going to buy new or used, and figure out the features you can’t live without. (Cloth versus leather seats, the color of your choice, etc.) Once you find the car, you should negotiate the price with a dealer or owner.
Only then – after getting the price to a place you can manage – should you talk about how you are going to pay for the vehicle.
Look for Financing First
It’s wise to check auto loan rates at credit unions and banks before you begin the car-buying side of the process in earnest. Many consumer advocates say it’s best to avoid allowing the dealer to provide or assist in finding financing for your car.
- Tip: At the very least, you shouldn’t allow a dealer’s financing offer to be the only offer. Why’s that? The Federal Trade Commission (FTC) and others warn that dealer-obtained financing may not be the best option for most buyers.
With tight profit margins, some dealers have been known to use financing to bring in extra money.
- For example, a customer who qualifies for an annual percentage rate (APR) of 5% might be told by a dealer they qualify for 7%, so the dealer can pocket the difference.
- This is key – before deciding which loan to take, compare the APR and the length of the loans. Typically, the longer the term of the loan, the more you end up paying in interest. Aim for a loan that spans five years or less.
And with car prices where they’re at, try to save as much as you can on the financing portion of the process. Be aware of interest rates too, as they are another cost to factor into your purchasing considerations.
Get Pre Approved
Besides a home, buying a car is usually the second most expensive purchase most people will make in their lifetimes. And just like with home loans, consumers can get preapproved for an auto loan before they ever step foot inside a dealership. Credit unions, in particular, often have highly competitive rates for both new and used car loans. Check with yours before you head to the dealership.
Know Your Credit Score
To make sure you qualify for the best auto loan rates, it’s smart to check in on your credit score and reports to know exactly where you stand. Those with higher credit scores, of course, tend to get better (lower) financing offers from lenders. Those with lower scores, in the range from 350 to 800, typically pay more. If possible, start reviewing your credit score and pull your credit reports a few months before you decide to buy so you can make adjustments if needed. Those who use the SavvyMoney tool already have 24/7 access to their credit score.
Don’t Forget The Cost of Auto Coverage
The final price you end up paying for monthly loan installments won’t be your only major expense for your new car. Besides things like gas and maintenance, you should also factor in the cost of auto insurance into your transportation budget.
With reporting by Casandra Andrews
Chris O'Shea
