How often do you drive by a car dealership and see the bright sign on the shiny car with the low percentage interest rate and think, what a good deal! But before heading into the dealership, you need to research if this is the real deal for your credit situation. There are many ways to navigate and understand car loans to get the best deal.
Car loan rates depend on several factors, including the type of car you buy, your credit score, and your lender. By understanding these factors, you’ll be closer to having a successful borrowing experience.
You need to determine how much you can afford to pay for the car every month, including ongoing costs like gas and insurance. However, when shopping around for the best financing options, focus on the TOTAL amount you want to spend, not monthly payments. That way, lenders cannot entice you into taking a longer loan term at the same “monthly payment”. By extending the number of months you pay, the lender makes more in interest, and you will pay more in the long run.
Many people finance through the dealership because it is often the easiest route. But it is not necessarily the best financial route.
The dealership is the middleman in auto financing. They send your information to their lenders, who in turn give the dealer a buy rate to finance your loan. The dealership marks up this rate to cover “handling” the deal.
By knowing what type of financing is available to you, you can either get pre-approved for a car loan through a financial lender or be in a better position to negotiate the car loan at the dealership.
Research is key to understanding all the terms and costs of the loan. When it comes to such a big purchase, do not hesitate to ask about all the factors that will play a part in your total cost. What’s the interest rate? How long is the loan term? Are there charges to start the loan or to pay it off early? What other fees and costs are built into the loan?
Keep in mind that whether you buy a used or new car will impact your loan. Interest rates on used car loans are usually higher because most lenders consider new cars to have a higher resale value.
Several aspects of your loan are negotiable, so you pay less in the long term.
- The annual percentage rate (APR) and interest rate. A lower rate means you will pay less to borrow.
- The payment terms. A longer loan will lower the monthly payments, but you will pay more interest over the loan period.
- Pre-payment penalty. If you can pay off the loan earlier than expected, negotiate the penalty amount or get removed, if possible.
Before walking into the dealership, do your research so that the math adds up and you get a decent deal for your vehicle.
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