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Finding the Best Auto Financing
Dear Dollar Stretcher,
We normally buy used cars and trucks but we decided to buy a new truck from a dealer. What advice would you give us to deal with the new car dealers.
Sheryl
Sheryl's question really has two parts. Naturally, she'll want to get the best price from the dealer. We looked at that last time. But, unless she's paying cash for the car, finding the best auto loan could reduce the cost of the car by up to 5%.
So how can Sheryl find the best financing? Let's examine some strategies and pitfalls.
Before she even shops for a loan it's wise to get a copy of her credit report. If there are errors on the report, cleaning them up before applying for a loan will save money. Remember, the interest rate you pay will be directly related to your credit history.
Once Sheryl has reviewed her credit report, it's time to shop for a loan. The local credit union or bank is likely to have a better financing offer than the dealership. So she'll start looking for a loan before she ever sets foot in a dealership.
There's another reason to shop for a loan before shopping for a car. The signed deal to buy the car isn't really complete. It probably includes a "subject to financing" clause. That means that you haven't really bought the car until you arrange financing.
So you could be sitting in the dealership dreaming of that new cruiser. Then the dealer discovers that you don't qualify for the low rate that they've quoted to you. Will you be willing to walk away from your dream car for 'a few dollars more each month'? The dealer counts on the answer being 'no'.
Avoid the problem by starting the loan shopping at your bank. Tell them how much you'd like to spend on a car. They'll check your credit. After that they'll propose an interest rate and what your payments would be. Have the interest quoted to you as an Annual Percentage Rate (APR) so that you can compare offers.
Write out a list of questions to ask the loan officer. This isn't a simple document. Some seemingly minor clauses can be expensive later. For instance, find out what happens if you want to pay the loan off early.
Once your questions are answered it's time to negotiate. Most newspapers list the rates charged by different banks and credit unions for auto loans. Ask your bank if they'll match the lowest rate on the list.
And don't concentrate on getting the cheapest monthly payment. Sure, you need to know that the payment is affordable. But a lower payment could hide the fact that you're actually paying more for the loan.
Your goal should be to get the lowest APR. On a 48 month, $25,000 loan a 2% difference in APR will cost you an extra $24 each month. That's a difference of $1,142 over four years. And, depending on your credit history, rates can vary by 3 or even 4%. That's a lot of money to give away.
Make sure that you know how many payments you'll make. Remember that a loan can cost more even if the monthly payments are the same. All they need to do is to make the loan last longer.
Avoid balloon payments. They're a disaster waiting to happen. Sure they'll lower your payments now. But if you can't afford a higher payment now, where will you get the money to make the bigger balloon payment later?
Credit insurance is not required by federal law. And it's very expensive life insurance. Negotiate with the lender. Some may require it. But, if your credit history is good you can always look for a lender that's more flexible.
Don't forget to check out any credit unions that are available to you. Often their rates are cheaper than banks.
There are two other popular methods of financing cars to consider. Some homeowners choose to borrow against the equity in their house and use that money to buy a car. And, generally, a home equity loan carries a lower APR than a car loan. But, it's important to repay the loan in a timely manner. Remember, you can't borrow $25,000 against your home every four years without paying it back.
Another option is to tap into your 401k retirement plan. Many 401k plans will allow you to borrow to buy a car. This can be a good idea, but you do need to be careful. First, some plans require you to completely repay any loans if you leave your job or are laid off. Second, you might find that you're not allowed to contribute while you have a loan outstanding. That could significantly effect the size of your retirement nest egg. Take the time to ask questions before you borrow the money. Making a mistake with your retirement plan could be very expensive.
Read every paper before you sign it. And, if you don't understand it, ask for an explanation. If you don't understand the explanation, ask for a copy of the document that you can take to a professional or trusted friend for help.
Make sure that the finance papers look the same after they come back from the credit manager. It's not uncommon for them to change the interest rate. And sometimes they conveniently forget to mention that fact to the buyer.
Once you've found good financing it's time to find a car you like and negotiate a price with the dealer. Then you can see what financing they have available. That puts the dealer in the position of having to match the well-shopped financing that you've already arranged.
Generally, dealers don't actually loan you the money to buy your car. They sell the loan for a bank or finance company. And they're paid based on how high the interest rate is. The more you pay, the more they make. Perhaps they'll have something better. If so, great. If not you won't find yourself stuck with overpriced dealer financing.
Sheryl has two opportunities to save on her new truck. We hope that she takes advantage of both of them.
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