Auto Loan Financing Tips

Allison Martin
Auto Loan Application

Car shopping can be stressful especially when you consider the amount of money you'll be investing in your vehicle. If you plan to finance your purchase, use these tips to help you secure the best deal.

Check Your Credit

Your credit score plays a significant part in the loan approval decision, notes Cars.com. However, you will want to confirm the accuracy of the contents included in your credit profile since they determine your FICO score.

You can retrieve a free copy of your credit report from each of the three bureaus, annually, by visiting annualcreditreport.com. Your score could potentially cost you, so confirm everything checks out before doling out your hard earned cash. Thoroughly review the information present for each account to ensure the outstanding balance and payment history is accurate since these components account for 30 and 35 percent of your credit score, respectively. Simply put, excessive debts and poor payment history have severe repercussions for your credit score, so report inaccuracies promptly.

If you find discrepancies, it's in your best interest to file a formal dispute.

Contact Credit Unions and Local Banks for Loans

It may not be in your best interest to accept the financing offer extended by the dealership. Instead, reach out to your current financial institution as they may have a more competitive financing offer available or be willing to work with you on the strength of your relationship. Also, ConsumerReports.com tells readers to inquire with local credit unions since they are nonprofit, have lower operating costs and offer competitive interest rates.

In June 2016, the average interest rate on a 48-month new car loan from a credit union was 2.62 compared to 4.58 for a bank loan, notes the National Credit Union Administration (NCUA). For a 48-month used car loan, the average rates were 2.79 and 5.09 for credit union and bank loans, respectively.

Online banks are another viable option as they also have lower overhead costs and can pass these savings on to the consumer in the form of lower interest rates.

Negotiate to Receive the Industry Rate

Bankrate.com offers an auto loan rate tool that displays the current average auto loan rate, along with trends over time. If you discover the current offers on the table are a bit too pricey, present your findings to the prospective lender and renegotiate.

If you are planning to purchase a new vehicle, ask the dealer about zero-percent financing offers that may be available to you. Banks usually reserve these for those with excellent credit, but there are always exceptions to the rules.

Read the Fine Print

While you may be set on financing your vehicle purchase, it is pertinent to understand that not all financing arrangements are created equal. The dealer's ultimate goal is to get you approved for a new car so they can turn a profit, but they may have to make costly adjustments to your financing offer to get through the red tape.

A common example of this is extending the loan term to create "more affordable" monthly payments. However, extending the loan term only creates additional interest, and you run the risk of being upside down in your loan or owing substantially more than the value of the car, once a few years have passed. By contrast, opting-in for a shorter loan term will cost you more per month, but may lower the interest rate, says MoneyUnder30.

Get a Co-Signer

Co-Signing

If your credit is less than perfect, securing financing for a new vehicle can be challenging. However, bringing a co-signer on board with stellar credit can drastically improve your chances of not only being approved but receiving a more competitive interest rate. In some instances, you'll save thousands of dollars on a loan. The only downside is they are on the hook if you default on the loan.

Make a Down Payment

Sometimes offering to make a down payment on the car will help you secure a great deal on a loan as it demonstrates to the lender you have cash on hand. Use an auto loan calculator like the one featured here to gauge how much you will save over the life of the loan by making a down payment.

To get started with the calculator, you'll need to have the following information available:

  • Purchase price
  • Anticipated down payment
  • Trade-in value (if applicable)
  • Interest rate
  • Length of loan term (in months)

Start with a down payment of zero, populate all the other fields and hit the calculate button. The amount of the monthly payment, interest paid over the life of the loan and total cost of the loan will appear. Next, hit the reset button and repopulate the fields with various amounts for the down payment until you reach a monthly payment figure that best suits your financial needs.

Some Important Considerations

Before signing on the dotted line, there are a few actions you should take.

Confirm Your Loan Is From a Reputable Lender

If you used the dealer's in-house financing department, review the final documentation to confirm you're receiving a loan for your car purchase from a reputable lender and not an installment agreement from the dealership. Otherwise, you could be forced to return the vehicle to the lot if the dealer is unable to secure financing for your vehicle.

Avoid Hidden Costs

The dealer may try to sell you an extended warranty or some other form of supplemental insurance. It's up to you to determine if it's necessary, but think twice before rolling the balance into the loan since it may be worthwhile to cover the costs out of pocket.

Seek Clarification

There are several administrative fees that accompany a new car purchase, such as tax, tag, title, registration, documentation and dealer fees. Unfortunately, some dealers like to take advantage of uneducated customers by tacking on other fees the customers are not legally obligated to pay. Before sealing the deal, ask for further clarification on any fees you are unfamiliar with.

Shop Around

Shopping around for the lowest price on your next car purchase is as important as finding the best loan. Therefore, it is important to do your due diligence to save a bundle on interest in the long-run.

Auto Loan Financing Tips