Shopping around for a car loan can feel a bit overwhelming. Auto financing is a science, but if you approach credit right, you can save a bundle and afford a new ride all at the same time — without getting scammed in the process. Just follow these savvy strategies for shopping around for your next car loan.
Know Your Credit Walking In
One of the essential factors in getting a car loan is having a decent credit score. If your credit score is above 700, you should have no problem securing approval for a car loan with an affordable interest rate.
The lower your score, the more variables come into play. Some, such as a high debt-to-income ratio, can render you a high risk to lenders. They may ask for more money down or require you to find a co-signer in case you default.
The higher your score, the better. Anything over 750 should let you negotiate terms with different lenders, increasing your chance to enjoy a low-interest rate that’s both attractive and affordable.
Shop for a Loan Before Going to a Dealer
Your dream car is sitting right out front at the dealership, which makes it tempting to go out and test drive it today. But before you fall in love and risk agreeing to virtually any terms just to take that ride home, shop around a bit. Don’t just take the first financing offer you receive.
Yes, you can get financing through the dealer, but it may or may not be the best terms in the long run. Dealers often get kickbacks when they go through their own lenders; there’s a significant amount of markup involved. That can result in you paying way more for your vehicle than you might otherwise need to pay.
When it’s time to shop around for loans and rates, go online and get pre-approved. Start with your own bank or some of the bigger lenders in your area. Being prepared before buying a car will help you lock in the best rate without being swayed by other deals.
Opt for a Shorter Loan Term
A good rule of thumb is to provide around a 20% down payment for your car loan. But if you don’t have that much saved, don’t panic. Even having some cash to work with is better than none at all. Showing the lender you have a decent amount of money to put down will shorten the length of your loan and boost your credibility.
Don’t count on equity from trade-ins for your deposit, either. While such funding sources can help, there’s no guarantee you’ll receive enough to make a difference.
Be Ready to Negotiate
Once you pick out a car, it’s time to talk to the seller or dealership. The dealer will likely come at you with a variety of financing options — prepare for that. Tell them you’re pre-approved elsewhere (preferably through your own bank).
If the dealer really wants your business, they may try to beat your current loan offer. If they can, and the rates are lower than what you already have, you may benefit from opting into the deal.
Dealers may try and tempt buyers with an attractive, low monthly payment. Remember that low typically means you’ll spend more time paying a loan down. The reason it’s lower is that you end up paying more interest over time — and the dealer or lender profits from that. Always choose the loan with the lowest interest and shortest term for the best deal overall.
Most importantly, be sure to read all terms and conditions carefully, checking for hidden fees. Never sign an agreement you don’t fully understand.
Banks and other financial institutions tend to provide the best rates and terms for vehicle loans. But there are other ways to score a great deal, too. Ask friends and family what their past car buying experiences were like. Word of mouth is a great place to start when it comes to finding a reputable dealer and lender. The initial footwork will take the stress and hassle out of the deal and get you into your dream car that much quicker.
