Shopping for a car loan is not always the most fun thing you can do. At every turn, it feels as though someone is trying to badger you into a higher interest rate or a longer loan term. Before you head to the car lot, here are some tips to help you get a better deal on your car loan:
Build good credit
One of the best things you can do if you want a good deal on any financial transaction is to build good credit. Your good credit score can mean savings of hundreds — or even thousands — of dollars.
Start out by visiting a website like Quizzle. A consumer credit site can give you an idea of where you stand, and even analyze your situation to provide pointers about what you can do to improve your credit. A solid financial foundation built on on-time payments, smart use of credit cards (pay off the balance each month) and different types of accounts can help you build up your credit history. It can take a few months to build up a good credit history, and it can take years to recover from poor credit. Plan ahead so that your credit situation is as good as possible before you start looking for a car loan.
When you have good credit, you are in a position to ask for lower interest rates and other loan terms that are preferable. Additionally, because you are viewed as responsible, lenders want your business because they know you are more likely to be a “sure thing” that will repay the loan. The best deal on a car loan starts with your good credit.
Shop around for the best loan rates
Once your credit is in tip-top shape, shop around for the best loan rates. You can start with your own bank. Many banks like to keep as many of your accounts as possible, and might be willing to give you a better deal. However, don’t assume that your bank has the best deal. Don’t jump at the first loan offer you see. Take your time. You can also shop around to other local banks and credit unions to find good rates. Online aggregators can also help you get bids on better loan rates.
Many experts will tell you to avoid dealer financing, but the reality is that you shouldn’t leave out the possibility. Sometimes dealers have great deals available. My latest car loan was through dealer financing, and I have a 1.9 APR. In many cases, dealers might offer incentives when you borrow, so you could receive offsets that make it worth it.
Car buying website FindTheBestCarPrice.com suggests pitting dealers against each other when looking for a good deal on a car. This process can be extended to include dealer financing. Ask the dealers what they can offer in terms of better financing, and compare that to what you’re being offered from more traditional lenders. Shop around, and if you have good credit, you’ll be more likely to get better deals — no matter who is lending you the money.
This step goes hand-in-hand with shopping around for the best loan rates. If you do go to a bank or credit union while looking for a car loan, ask for a pre-approval letter. This will be needed if you are buying a car from a private party. In many cases, dealers also want to see the pre-approval so that they know how much you can borrow.
Your pre-approval isn’t an agreement to borrow from a certain lender, though. You can use this letter as part of your effort to negotiate a better car loan deal with someone else. It makes a great starting point for your negotiations, and can help you as you get others to compete for your business.
Stick to your loan amount
Finally, make sure you stick to your loan amount. One of the pitfalls of dealer financing is that salesmen try to get you to focus on a monthly payment, rather than the total loan amount. This means that you might pay an affordable amount each month, but you could end up with a bigger loan than you wanted, and you could pay it for longer than you expected.
Be clear about the total amount you want to pay for your loan. Your pre-approval letter can be a great reminder of what you want to spend. A dealer might be willing to finance more than a credit union, but you’ll pay for it down the road. Don’t let this other mumbo-jumbo pull the wool over your eyes and result in a loan you don’t want.
You can get a good deal on a car loan. It takes effort and persistence, however. Start planning now, and the effort could save you hundreds of dollars down the road.