During my teenage years, I was fortunate enough to receive my first car as a gift from my mother. Once it was time for a new set of wheels, I quickly drove to the nearest auto dealership and started my search. Little did I know, getting a good deal on a new car requires a ton of research. And the financing process took much longer than I had anticipated.
Luckily, I took the time out to call a relative that was much more seasoned than I was in this area. Not only did I save thousands of dollars, but I learned a ton about auto loans.
Here are some tips you want to consider prior to securing a loan for your new ride:
1. Explore Your Options
There are two ways to finance your next car purchase.
Under this arrangement, the loan is obtained directly from a financial institution or online lender, and the funds are distributed directly to the dealership at the time of purchase. The terms of the loan, including the interest rate and repayment period, are issued directly by the entity lending the funds.
According to the Federal Trade Commission (FTC), direct lending is a viable option because it grants you the flexibility to shop around for a lender with the most competitive financing terms and secure a pre-approval prior to searching for a vehicle. The latter is beneficial when determining your affordability since you are more likely to push the envelope when at the dealership.
You also have the option of securing a loan directly from the dealer. While doing so may limit your ability to explore several options, the financing terms may be negotiable. Furthermore, it may be a more feasible alternative if the dealer is offering specials on the vehicle you are considering for those using in-house financing.
2. Research Current Loan Rates
Instead of taking the loan officer’s word for it, use Bankrate’s auto loan tool to get an idea of the average interest rates being offered on the market and if they appear to be increasing or decreasing over time.
“If you are not in a super hurry to buy your car you might get a lower rate simply by waiting for the right time to take out a loan,” notes Carfax.
3. Obtain Your Credit Report
In most instances, the most competitive financing terms for auto loans are given to the applicants with excellent credit. Stellar credit may also increase your bargaining power when negotiating the terms of an auto loan financing agreement.
Having less than perfect credit will not necessarily exclude you from qualifying for a loan, but it may force you to pay hundreds, if not thousands more on your next vehicle purchase.
Access your credit report for free at annualcreditreport.com to confirm the accuracy and timeliness of the contents. Also, check your credit score since it is the figure that most lenders use to gauge your creditworthiness and determine what interest rate you qualify for.
“You want to check all three because you don’t know which one the lender will use and you want to give yourself time to fix any mistakes,” Gerri Detweiler, director of consumer education for Credit.com, told CNBC.
4. Consider New Models for Lower Rates
Dealership often offer zero-percent financing or an extremely low interest rate if you purchase a new model and secure your loan in-house. Consumers who chose to finance the purchase of a new model from a direct lending source have also received substantially lower interest rates than those who purchased used vehicles, notes Cars.com.
5. Select a Brief Loan Term
While extending the loan term will yield a lower monthly payment, you may be subject to a higher interest rate that will cost you more over the life of the loan. Furthermore, there is always the possibility of owing substantially more than the car is worth once it is paid off.
6. Speak With Your Financial Institution
Whether you are a member of a major bank or credit union, you should inquire about what loan options are available to you before applying. Reasoning: there may be more competitive loan products available to current members, but not advertised, than what is offered on the market. In addition, you may have better chances of securing a pre-approval if your credit is less than perfect than you would have elsewhere.
7. Find a Co-Signer
If the potential lender perceives you as a high credit risk, you may be denied for financing. However, bringing a co-signer on board with a stronger credit profile will not only increase your chances of being approved, but possibly save you money with a lower interest rate.
8. Confirm the Financing Offer Is Final
Surprisingly, it is possible for the dealership to let you drive off the lot with your new car without actually having the proceeds from the financing arrangement at their disposal. End result:
“You must return the car to the dealership, they say, or negotiate a new loan at a higher interest rate. If you don’t, you could lose your deposit and trade-in, and you may even be charged a rental fee for the time you had the vehicle. Faced with this situation, most people cave,” says CNBC.
However, this headache can be avoided when using dealership financing. At the time of the sale, request a confirmation that the financing is finalized or you could end up forking over a wad of cash to sort things out.
9. Seal the Deal
Upon reaching an agreement with the lender or dealership, carefully review the contents of the contract and seek clarity to ensure you fully understand the financing arrangements before signing on the dotted line.
Do you have any additional tips you’d like to share? Let us know in the comments below.