Thinking about financing a car loan? It’s said that cash is king but when it comes to buying big ticket items like cars and houses, cash isn’t necessarily better or the most practical choice. Once you’ve located and negotiated for your new dream car, you may be ready to discuss your payment options. Congratulations!
Tips for financing a car loan:
■ Get a copy of your credit report beforehand. Knowing this information allows you to figure out whether or not you are candidate for special financing rates and incentives based on your credit history.
■ You’re entitled to a free credit report every 12 months. According to the US government’s Federal Trade Commission, the Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. This is regulated by the FTC and is not a gimmick.
Just visit annualcreditreport.com or call 1-877-322-8228. The law allows you to order one free copy of your report from each of the nationwide credit reporting companies every 12 months, but you must use the central website or the toll-free number that has been set up expressly for that purpose. In other words, you could stagger your complimentary credit report requests throughout the year and actually receive 3 free credit reports (one from Equifax, one from Experian, and then one from TransUnion) during the same 12-month period.
■ When it comes to financing, you need to ensure that you don’t end up over-paying because of astronomical APR (annual percentage rate). Focus on keeping the APR reasonable, and not just on keeping the monthly payment low, because that’s how you end up paying out the nose for the long term.
In the past, local banks and credit unions have been able to offer much lower interest rates on car loans (around 4% as a national average) than what you might receive directly from the dealership, but then again the dealerships have started to become more competitive and as of 2015 I’ve seen APR finance offers as low as 0.9% for qualified buyers.
■ The dealership wants to sell you financing. They are likely going to bring up financing options early in the negotiations. The dealership likes to broker the financing because it’s another source of revenue for them. And because so many car buyers foolishly focus only on what they can afford to pay monthly, it leaves them vulnerable to thinking that a car deal is good because the monthly payments are low enough even though they may actually be over-paying for the car and the loan overall.
■ Watch out for the upsell. Finance managers love to paint a picture of doom and despair if you don’t tack on extra insurance and warranties. Whatever it is, remember that every add-on results in even higher interest paid on the loan, so don’t inflate your loan repayment unnecessarily.
■ My personal recommendation? Be open to securing your own financing outside of the dealership. Kelley Blue Book recommends using RoadLoans.com to find the best deal available on both the vehicle and the interest rate on the loan, but you might also explore the dealer’s seasonal promotions for new or certified pre-owned vehicles especially if you have good credit.
Cars.com has a useful car loan financing calculator that can assist you in estimating your monthly payments.
You want as low an APR as possible, and ideally you also want a loan with no prepayment penalty. This is crucial as it leaves you the option to pay off the loan early (maybe by making extra payments that satisfy the loan obligation in 2 years rather than 5). Personally I would avoid anything beyond a 60-month loan if I could, and regardless of the length of the loan I’d make sure I could pay it off well before the deadline. All that interest can really up, even if your monthly payment is technically lower.