With interest rates still hovering near historic lows and the credit crisis a fading memory, the stars may be aligned for auto buyers. However, few things can cause more angst than trying to find the best deal on a new car and securing the best auto financing which, next to house, can combine to become the most expensive purchase people make. The difference of just 1 percent on an auto loan can increase the total cost of a new car by hundreds of dollars over the life of a loan. There’s really no secret to finding the best auto loan rate; it just requires a little patience and the willingness to perform the extra due diligence. By following these four steps, your chances of securing the lowest cost auto financing are substantially increased:
Clean up your credit
In auto lending, just as in any other type of lending, your credit score is the biggest determining factor in how much your credit will cost you. Sometimes, the difference of just 25 points in your FICO score can cost you (or save you) big bucks. Well before searching for auto financing, order your credit report. You are entitled to receive one free credit report each year from each of the major credit bureaus; however, if you want to see what the auto lenders see, you should also order your credit score directly from FICO. You should allow yourself time to fix any discrepancies. One of the quickest ways to increase your credit score is to pay down credit card balances to well below 30 percent of available credit. And, under no circumstances should you open any new credit accounts.
Important note: If you end up applying for more than one auto loan, it’s important to submit all of your loan applications within a two week period. That way the multiple credit inquiries won’t adversely affect your credit.
Shop your loan before shopping for your car
Most car buyers make the mistake of walking on to the car dealer lot without first having secured their financing. If, as 80 percent of car buyers did last year, you wind up with a new car financed by the auto dealer, chances are you either paid too much for the car or the loan. Car dealers are notorious for manipulating the financing around the “negotiated” price of the car because they have to always come out on top.
Instead, shop the loan rates between credit unions, your bank, and other local banks, all of which can offer very competitive auto loan rates. If you can get prequalified by a lender, you can, essentially, walk on to the lot with cash in hand. Then, once you have negotiated a final sale contract with the dealer, you can ask if they can come up with a better financing deal.
Stay focused on the loan cost, not the monthly payment
While the monthly payment amount is important because you need to be mindful of your budget, the more important consideration is the total cost of the loan. It may be tempting to stretch the term of the loan out because it might lower your monthly payment; however, to secure the lowest cost loan you should get the shortest loan term possible that still fits within your monthly budget.
Zero percent financing or dealer rebate? Take the rebate
Nothing sounds more enticing than free money, which is, essentially, what you get if you are able to qualify for 0% financing from a dealer. But, when the option for a dealer rebate is also available, the choice between the two may not be so clear. Do you take the $2,500 rebate with the 6 percent financing from your bank, or zero percent interest? It’s a question that can only be definitively answered when factoring in individual circumstances; however, as a general rule of thumb, if you can pay less for your car up front (negotiated car price less the rebate), you are more likely to come out on top. Just do the math before choosing an option.
Here are two very important tips to ensuring you don’t wind up paying more for your financing than necessary:
- Read the fine print of the contract – Never drive off the lot with a new car until you’ve studied the contract. If that requires that you take it home before finalizing the purchase, so be it. You need to pay special attention to certain clauses, such as mandatory binding arbitration, prepayment penalties and variable interest rates.
- Never agree to conditional financing – Never drive off the lost until the financing has been completely nailed down. Anything that is “conditional” or “contingent” can be changed which means you could end up paying more for your car than you bargained for.