We’ve already talked about what to look for if you decide to buy a car. And you know you need to negotiate the asking price and keep your chin up during the buying process. But what about finding a fair auto loan? In most cases, when you buy a new car, you don’t just plunk down $20,000 up front – you show up with cash from a bank loan, or you finance your new ride.
Before you sign on the dotted line, here’s the skinny on getting the best auto loan you can.
Know Your Numbers
Before getting a loan, or making an offer, find the car’s standard retail price. Use Kelley Blue Book to look it up. Then, SRP in hand, compare costs of your car online and with multiple dealers (you can also use Yahoo! to find dealer quotes). Whatever you do, don’t approach any dealer without a price in mind, either the total you are willing to pay or the total the bank loaned you.
What’s your credit score? If you need a loan to buy your new car, you can do some homework in advance by checking your credit report. (You can check each of the three major bureaus’ reports three times each year FREE at AnnualCreditReport.com .) Getting a loan for a new car is like any other loan: your interest rate will depend on your credit history, the terms of the loan, and the amount of your down payment. This article on how credit scores affect purchases gives you a general picture of how much money you can save if you up your FICO score.
Bottom line: don’t shop around until you’re sure your finances are in order on paper – lenders will check.
Consider All Lenders First
Maybe you’re committed to buying a car – there’s always the option of leasing, too. (Read up on how to lease a new car here.) When you have some figures in mind, and a good sense of what your credit history will get you, these are the places to go for a loan:
- Credit Unions
- Online Lenders
- Peer-to-Peer Loan (a.k.a. “P2P”)
Dealership financing should be a last resort – don’t get talked into anything. The reason? If you get a loan, the dealership has to treat you like a cash buyer, not a potential source of interest earned. You’ll have more negotiating power at the table.
Loan Features to Consider
There are other factors to consider when getting an auto loan. It’s always tempting to sign on the dotted line when you’re jonesing for something new, big, and shiny for only a fraction of its cost up-front, but be very careful – a loan is a long-term commitment. Consider the following:
- Will you be charged prepayment penalties? You can get nailed with a penalty for paying off your loan early. This is called a “prepayment penalty,” and it’s a nasty surprise. Verify that your loan will not assess penalties for prepayment before signing the note.
- How much will you save if you make a larger down payment? You can often negotiate the loan’s terms by paying a larger percentage of the total cost up-front, reducing monthly payments, shortening the life of the loan, or even qualifying for a lower interest rate.
- How long is your loan term, and is the interest rate fixed? Car loans shouldn’t exceed 60 months (five years). And it should go without saying that the only loan you should consider is a fixed-rate loan!
Already Got a Loan? Think About Refinancing
Maybe you took double-digit financing from a dealer when you bought your new car. Maybe your credit wasn’t very good. Or maybe you’re just now realizing you got a bum rap on your car loan.
If your credit is good, refinancing might be an option. BankRate, RateGenius, AutoLoanSoup, and MyAutoLoan are handy online resources that help you find and compare refinance options. (There are also direct lenders online. But starting with a referral site like RateGenius, which compares rates for you, may make it easier to find the best fit loan.)