Car Loan Tips

View this document (PDF)

How to Avoid a Higher Interest Rate in Your Next Car Loan

Buying a car can be a daunting and intimidating task with tricks and traps at every turn.  Car buyers often spend countless hours researching the best vehicles, comparing key features, and ultimately finding the best deals.  But when it comes to financing their new vehicle, car buyers are often left in the dark as to what constitutes a good car loan and what abusive practices to avoid.

To help car buyers navigate the murky waters of a new car loan, we have come up with the following quick tips that should help you secure a more affordable car loan next time you step on a car dealer’s lot. 

Car Loan Tip

Run Your Credit Report

Before embarking in your car buying journey, request your credit report from the three credit bureaus.  You can request your credit report for free once a year by visiting annualcreditreport.com or by calling 1-877-322-8228.  Your credit report will give you a glimpse of your creditworthiness and inform you of any possible shortcomings.  Knowing of all this before stepping into a dealership will guard you from the most aggressive selling tactics and help you walk away when the financing offered is not in your best interest.

Car Loan Warning

Be careful to avoid paid credit reporting services.  Only annualcreditreport.com is authorized to request a free credit report for you under the law. Paid credit reporting services often carry hidden fees and undisclosed costs.

Car Loan Tip

Visit Your Nearest Bank or Credit Union To Get A Quote

Once you have your credit report handy and a have a good idea of what type of car and price range you are looking for, head over to your nearest bank or credit union to see what kind of interest rates they are offering on their car loans. In some cases, particularly if you already know exactly what vehicle you want to purchase, the bank or credit union may pre-approve you, thus letting you know exactly what interest rate and monthly payments you should expect in your car loan.

Car Loan Warning

Be sure to shop around and to compare rates. Visit more than one financial institution to get a quote and to find out what interest rates they are offering on their loans. This will give you a better idea if you are getting a good deal or not.

Car Loan Tip

Negotiate for a Better Rate

Despite the loans offered directly by banks and credit unions, eight out of every 10 car buyers finance their vehicle through a car dealer. Whether it is the convenience offered or simply the marketing tactics deployed, if you find yourself behind closed-doors in the finance and insurance department of a car dealer be ready to negotiate for the lowest interest rate possible without feeling intimidated. Knowing your credit history and the loan rates offered directly from banks and credit unions in your area will definitely give you the upper-hand in getting the best car loan possible, but remain weary of any interest rate markups added on by the dealer. While a car dealer may initially originate your loan, it often attempts to sell the loan to a third-party lender for a profit. This profit is made by arbitrarily raising the interest rate of your car loan. If the interest rate offered by the dealer is higher than what you anticipated, just ask for the desired interest rate and renegotiate.

Car Loan Warning

Try to avoid any add-on products offered by the dealer. Products such as vehicle service contracts, guaranteed auto protection insurance, credit life and disability insurance, and many others are often overpriced and unnecessary. Car dealers often sell these products to raise the cost of their loans and increase their profit margins. If you really need any of those add-on products, try to purchase them outside the dealership for much cheaper.

Other Things to Consider:

 

Comparison Shop Online: The internet has made it a lot easier for consumers to compare car prices and loan rates online. Start your research there before you head out to the dealership.

“Yo-Yo” scams: “Yo-yo” scams or “spot deliveries” occur when a car buyer drives away with the vehicle without finalizing sale. Once home, the dealer will call back the buyer claiming that it was unable to fund the loan at the agreed-upon terms. The buyer must then return the car to the dealer and often renegotiate the loan at a higher interest rate than one agreed-upon before.

“Buy Here and Pay Here” Dealers: “Buy Here Pay Here” dealerships typically finance used auto loans in-house to borrowers with no or poor credit. The average APR is usually much higher than a bank or credit union loan. The car loans made by these dealers are often unsustainable and lead to a high rate of repossessions.

Take Your Time: The average consumer spends 45 minutes with the finance and insurance department at the dealer (only 27 minutes if they take a test drive), so take your time to consider your lending options and don’t feel pressured to sign the dotted line. You have the right to take the entire paperwork home before agreeing to the loan.

Don’t Get Caught In The Monthly Payment Trap: Dealers will often attempt to mask the true cost of their loans by focusing on the monthly payments. Be sure to compare the total cost of all the loans offered and to choose the one that is less costly to you in the long run.