Finding the right loan is a crucial step when buying a car. It’s important to remember that terms and rates vary greatly between lenders who offer new and used auto loans, and making the right choice could save you thousands of dollars in the long run. If you’re smart about it, you’ll not only receive favorable terms, but you’ll have the flexibility to switch vehicles mid-term, pay off your loan on an expedited schedule, and more. Crucial to borrowing wisely is preparation, and there is a lot to consider even before starting the car search.
How to Approach the Search
Your credit status is one of the most important things to think about, even before shopping for local lenders. A credit report and the corresponding score are by far one of the most important tools that lenders use to determine creditworthiness, and the loan terms they will (or will not) offer. Make sure to request up-to-date copies of your credit report through one of the major credit report agencies.
Even if you’re already familiar with your credit score, which is used to determine mortgage rates and other financing terms, it’s important to note that the bar is set a bit lower for auto loans. Still, small dings in this credit history might prevent a lender from granting the best available terms, so it is recommended to remove any erroneous and potentially harmful entries from your credit report before beginning the application process.
Think Long Term
It is crucial to consider how much you actually want to spend. Even more vital is that you don’t think about it in terms of a monthly payment, but as a total sum – principal plus interest. It may be tempting just to consider the monthly expense, but because nearly any loan can become “affordable” simply by extending the term, this perspective can trick you into accepting an offer you cannot really afford – and driving a car well past its prime.
Auto loans usually last under 7 years, but choosing a longer term may mean that you end up owing more than the car is worth at the tail-end of the loan. It would also be wise to factor in maintenance and insurance costs into your calculations.
Finding the Best Lender
Only the Desperate Borrow from the Dealership
Rule number one for finding a good car loan is not to go for the loan that the dealership offers. It might seem convenient to get the car and loan at the same place, but convenience is about the only advantage. These loans are pricey and usually inflexible. In fact, it is best not to begin a discussion with any single dealer before all the other options are exhausted. Check local credit unions, Peer-to-Peer lenders, banks, online lenders or even auto-insurance companies first.
Banks usually cater towards borrowers with good credit and offer more competitive loans accordingly. Credit unions only extend loan offers to members, and this also helps them to provide economical financing, sometimes with interest rates even lower than what is available from the bank. Online lenders work similarly, but a degree of separation and lack of prior relationship with borrowers means that terms may not be as good. With that being said, online lenders offer a much quicker and easier solution, and sheer number of options means you’re more likely to find the terms that suit you. Regardless, having options before walking into the dealership means that you will have the upper hand, not the salesman on the other side of the desk.
Conduct Proper Recon
With a wide variety of alternatives at your disposal, some due diligence should be done to determine how reliable these lenders are. Checking the Better Business Bureau is a good start. You should also try the state attorney’s office (or other institutional bodies that control lenders), online review sites and more.
Applying for the Car Loan
Equipped with a healthy credit report, a list of the best lenders and determination to do things the right way, the time has come to apply for an auto loan. It’s entirely safe to apply for an auto loan from every lender on your list, if you keep a few caveats in mind.
Getting pre-approved for a loan at any of the lenders on the list of options is important for having added bargaining power. Most lenders that feel comfortable with the loan will prove it with pre-approval paperwork, which is a token representing a bulk amount they are willing to lend, regardless of the vehicle itself. Approaching any negotiation without pre-approval from other lenders will likely not end with the most favorable offer.
Avoid the Upsell
If you’re getting financing through a dealership you need to understand that most of the profit that the dealer makes on your deal is on the loan, not the car. Therefore, most dealers will try to convince you to extend the loan or take a vehicle that is more expensive, and then justify it through some deft financial maneuvering. This is never a good idea, as loans that might seem affordable today can quickly turn a bank account inside-out.
How to Optimize the Auto Loan Being Offered
Play the Game
Using “open market” tactics is recommended when sitting down at the car dealership. Whichever dealer has the best price on any single car is unrelated to the quality of a loan it might offer on the same car, so creating competition is recommended. Do not approach the dealer without the pre-approval papers of other lenders and only accept a final offer that really works for you.
Read the Fine Print
Regardless of who you end up taking a loan with, you should always go through the contract with a fine-tooth comb. Some loans look great at first, but the fine print may reveal a lack of flexibility when it comes to repayment. Here are a few of the things to look for:
- Prepayment Penalties. This represents a potentially expensive downside if you want to practice diligence by paying off your loan before the set term. These prepayment penalties mean that paying in excess, or more frequently than what is originally agreed upon, punishes you with extra fees. While it is logical for lenders to want to drag out more interest, discouraging their borrowers from making good on their obligations can be a big red flag.
- Mandatory Binding Arbitration. Another one to avoid, this contract provision means that any disputes between the lender and you must be resolved through an arbitrator instead of a court of law. Disreputable lenders often use this to prevent their borrowers from exercising their rights in pursuit of a fair agreement.
- Variable Interest Rate. While most auto loans are fixed-rate, some make use of variable rates – an APR that can increase or (rarely) decrease in the middle of a term. This is by no means a deal-breaker, but you should always calculate your monthly payments based on the highest rate or risk receiving an unaffordable loan.
Commitment Requires Finalization
Finalizing a loan means setting the agreed upon terms into stone in the form of the final contract. This could be the same one initially provided by the lender or the last of several drafts, but regardless, this document also needs to be checked thoroughly. The car should not be driven off the lot until the loan terms are finalized.
Some dealers make the auto purchase contingent upon gaining financing, which is no problem with proper preparation. However, others will say that financing is finalized when it is not. They might allow the customer to take the car home and then call to report some “trouble with the financing,” which pigeonholes the customer into accepting costlier terms or paying hefty fees for putting wear and tear on a vehicle that was never truly theirs.
Getting a fair auto loan might seem intimidating, but with a proper approach, the power is in your hands. With a bit of work, which involves comparing the best car loan providers on the market, you can find the terms and rates that suit you best and you’ll be driving away in your dream car in no time.