For many households having a vehicle is essential. Inflation has caused a considerable increase in the cost of new and used vehicles. The price for used cars and trucks has increased some 40 percent since January 2021 and new cars 12. Auto loan amounts are also on the rise. Automobile loans are the third-largest consumer debt in the United States. It’s important for consumers to shop smart when looking to finance an auto purchase. Whether you’re a first-time borrower or a seasoned automobile owner, here are some helpful tips to consider when shopping for an auto loan.
Making a Budget
Before you even shop for a lender, look at your finances and set a budget. This will give you a good idea of what you can comfortably pay for a vehicle and maintain it. Your budget should include the price of the vehicle, taxes, title costs, and dealer fees. Also take into consideration not just your monthly payments, but also ongoing costs for vehicle maintenance, fuel, annual registration fees, and insurance. Having a budget gives you a better chance of ending up with a loan you can afford.
Check Your Credit
When applying for a loan, lenders will check your credit. Your credit score determines what kind of auto loan you can get and how much interest you will pay for the loan. It’s important that your credit report contain current, accurate information. Obtain a free copy of your credit report at www.annualcreditreport.com or by calling (877) 322-8228. If you find any errors, report them right away by filing a dispute with one of the three major credit reporting agencies.
Get the Price in Writing
Before you visit the dealership and talk about financing, get an “out-the-door” price of the vehicle. The dealer should send you the total price of the car, including taxes and fees, before financing costs. Having this information will help you shop around and compare the prices of different dealers.
Need a Co-signer?
If you have a limited credit history or a low score, you may consider getting a co-signer. A co-signer is someone that is contractually obligated to pay back the loan, just as you are. A co-signer with good or excellent credit may be able to qualify the loan for a significantly lower interest rate.
Due to the obligations of repaying the loan, you and the co-signer should consider the decision carefully. If you fail to make payments, both parties are responsible for repaying the loan. Any late payments will affect both your credit and that of your co-signer.
If you have a trade-in, look up the value of your vehicle beforehand. Use websites such as Kelley Blue Book, Edmunds, Consumer Reports, and NADA Guides to look up your vehicle. Comparing similar vehicles sold in your area can help you figure out a fair price. Once you have an idea of how much your vehicle is worth, you can decide if you want to trade it in or sell it on your own. If you decide to use it as a trade-in, negotiate with the dealer on the value that will be credited towards the vehicle purchase. If you sell it on your own, you can use the money as a down payment.
Hold off on discussing the option of a trade-in until after you’ve negotiated the best possible price for your purchase. This can help ensure that the seller doesn’t adjust the sales price to make up for a generous trade-in offer.
If you have an auto loan on the trade-in, think about your ability to pay off the old loan. If you owe more than your vehicle is worth, you have negative equity (also considered being “upside down”). If you roll the balance of your existing loan into a new loan, costs may be higher. Being upside down can reduce your options if you later wish to refinance.
Dealers typically offer optional add-ons with the vehicle purchase. Some common add-ons are:
Vehicle service contracts or extended warranties. Extended warranty or vehicle service contracts cover the costs of some types of repairs in addition to or after the manufacturer’s warranty ends. They typically exclude routine maintenance (i.e., oil changes and tire replacement).
Guaranteed Auto Protection (GAP) insurance. GAP insurance can pay the difference between the value of your vehicle and the amount you owe on your loan in case the vehicle is stolen, damaged, or totaled.
Credit Insurance. This is insurance that covers your auto loan payments in certain situations, such as death or injury, or loss of employment or property.
If you want one or more of these products, check and see if you can get a better price. Your insurance company may also offer these products.
Dealer-Arranged vs. Bank Financing
Banks, credit unions, and other lenders can “pre-approve” you for a loan. Upon assessing factors such as your credit score(s), the terms of the transaction, and the type of vehicle, the lender can provide you with a quote that includes the interest rate, loan term, and maximum loan amount. They will provide a conditional commitment letter to take to the dealership.
With dealer-arranged financing, the dealer collects and forwards your information to one or more prospective auto lenders. If the lender(s) chooses to finance your loan, they will authorize a “buy rate.” Keep in mind that the interest rate you negotiate with the dealer may be higher than the “buy rate” if they include dealer compensation for handling the financing. Ask or negotiate for a loan with better terms.
Make sure to compare the finance offered through the dealership with the rate and terms of any pre-approval you received and choose the option that best fits your budget.
Some dealers provide “in-house” financing to borrowers with no credit or poor credit. The interest rate on these types of loans can be much higher than loans from a bank, credit union, or other type of lender. Even if you have poor or no credit, it may be worth it to see if a bank, credit union, or another dealer has a better loan offer.
With any loan, make sure to thoroughly read the finance agreement and ask any questions about the terms before signing. It may be best to wait until financing has been fully approved before signing the sales contract and getting rid of any current vehicle.
Tips for Reducing Loan Costs
There are things you can do to lower your loan costs. Some ways to reduce loan costs are
- Saving for a larger down payment
- Opt for fewer add-ons, options, and features when purchasing
- Find a less expensive vehicle
Save money over the life of the loan by getting quotes from multiple lenders and comparing offers. Negotiate for the best interest rate available to you. Ask the dealer about special financing offers available on the make and model you’re interested in. You should also inquire about any available rebates, discounts, or special processes for which you may qualify.
Start by checking the reputation of thousands of lenders, dealerships, and other companies on our website. Being prepared can save you money and help you get the right auto loan for your budget.
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