August 6, 2018
August 6, 2018
Very few people pay cash for a car anymore. Not only is financing typical, but it’s also not uncommon to cover the entire purchase price with a loan. That makes getting a good deal on a car loan mission-critical to the car purchase process.
Here are five tips for getting a good deal on a car loan.
The interest rate and terms on a new car loan are closely tied to your credit score. The higher the score, the lower the rate and the better the terms you’ll get. But if you have a low score, you can easily end up in a loan that’s a bad deal. It might even be a subprime loan, with an interest rate higher than 20%.
The best way to avoid this is to clean up your credit before you make an application for a car loan. Start by getting a copy of your credit report. Sites like Credit Karma can give you access to your credit information for free. They don’t give your actual credit report, but they do provide your credit scores, as well as the components that make it up. If there’s derogatory information, they’ll provide the details.
The other alternative is to get a copy of each of your three credit reports, from TransUnion, Experian, and Equifax. You’ll need all three so you can see exactly what’s contained in each report, but also because you can never know which report a lender is relying on.
You can get a copy of each report for free at AnnualCreditReport.com. They are the only source that’s officially permitted to provide you with your actual credit report from all three bureaus. You’re entitled to one credit report from each bureau every year, free of charge.
When you get the report, study it and look for derogatory information. If any information is in error, dispute it and have it removed. If you owe any past due balances or collections, pay them off as soon as possible.
Increasing your credit score by just 20 or 30 points can make a major difference with your car loan.
Being upside down on your car loan is a car industry term that describes owing more on your car than the car is worth. Your car is worth $12,000, but the loan balance on it is $14,000. You’re upside down by $2,000.
It means you won’t have a trade-in on the new car from your old car. Not to worry – the dealership will figure it all out for you. But you probably won’t like the way it’ll go. Worse, they may not even tell you what will happen.
But here’s how it will play out…
The dealer will take your old car as a trade-in, even with the $2,000 deficiency. Let’s say you purchase a new car for $20,000. The dealer will arrange for you to get a $22,000 loan. That will enable you to both purchase the new car, and pay off the deficiency on the old car.
But the problem is that you are now upside down on your new car. It’ll be even worse because the new car will depreciate quickly after purchase, sometimes immediately after driving it off the lot.
Let’s say your new car falls to $17,000 from $20,000 just from driving it off the lot. You now owe $22,000 on a car that’s worth $17,000. It means your deficiency balance – the amount by which you’re upside down – increases from $2,000 on the old car to $5,000 on the new car.
And here’s the unkindest cut: because you’ll be upside down on your new loan, you’ll pay a higher rate for the financing.
Unfortunately, this is common in the car business. The best strategy is to make sure you’re not upside down your old car before buying a new car.
Many people rely on the car dealership to provide the financing as well as the car. This is not always a good step. Financing is a major source of revenue for car dealerships. They may steer you into a subprime loan, not because your credit is poor, but because they earn higher fees for doing so.
The better alternative is to go through a bank or credit union for the loan, preferably one you already deal with. Credit unions are especially good sources for car loans, since they are member-owned, and always work to get the best deal possible. You’ll probably get a lower interest rate, and they tend to be more lenient with credit issues.
If nothing else, get a car loan pre-approval from your bank or credit union. Bring that into the dealership, and if they want to provide the financing, they’ll have to give you a better deal than what you already have.
Also, having a pre-approval letter gives you a stronger bargaining position. The dealer already knows you’re qualified to buy the car and will be more accommodating with your preferences.
Armed with a pre-approval, accept dealer financing only if it’s a better deal than what the bank or credit union is offering.
No one likes to put up a down payment if they can avoid it. But it can make a real difference in trying to get a good deal on a car loan. By making a down payment equal to at least 10% of the purchase price of the new car, you’ll improve your chances of both approval and a lower interest rate. A 20% down payment is even better.
The reason why this is true is that your down payment makes the loan less risky for the lender. They’ll be more willing to work with you, even if you have some credit problems.
Naturally, the trade-in on your old car is a primary down payment source. That is, as long as you’re not upside down on the car. Failing that – or supplementing it – would be to put up some additional cash. The larger the down payment you make, the better the terms you’ll get.
Choose two or three of these strategies, and you’ll be more likely to get a good deal on a car loan.