Tip of the Week
Another Option for Financing Your Car
Many car dealers practically guarantee you a loan even if your finances and credit history are shaky. For the dealers, lending is a great strategy for increasing car sales. But is dealer financing always the best option?
Here’s something to consider: Many used-car dealers make the bulk of their profits from financing the sale of their cars through high interest loans. That’s right! They make more money from the loans than from the sale of the actual vehicles.
And those “zero-percent interest” loans served up by new-car dealers? Well, those dealers aren’t really loaning you money for free, because those zero- or low-interest loans will generally require you to pay the full sticker price for the car, without the discounts or incentives other buyers get.
That’s why it pays to shop for a loan separately before you even set foot on a car lot.
Because purchasing a car is one of the biggest financial decisions you’ll make, it’s a good idea to spend just as much time researching your financing options as you spend researching the car.
Applying for a loan from a bank or credit union ahead of time is a great way to do that. You can apply for a loan before you decide what car to buy, which means you know exactly how much car you can afford when you go shopping.
When you’ve been approved for an auto loan ahead of time, it gives you more negotiating power for the car purchase. You can essentially act like a cash buyer, shopping around for the lowest price and best incentives you can find, without worrying about dealer financing.
It also lets you know the truth about interest rates and your buying power. How do you know if the car dealer is really offering you good terms for the loan? Well, if you have a pre-approved loan from an outside lender, you’ll have at least one measuring stick for seeing how good of a deal you’re really getting on financing.
The more loan quotes you have at your disposal, the clearer a picture you’ll have of what’s a good deal and what’s not in the loan marketplace.
Many of today’s buyers are financing their cars for long periods of time to keep the payments low. And the longer the term and bigger the balance on your loan, the more interest rates will matter to your overall financial picture.
By getting pre-approved for a car loan ahead of time, you’ll be able to get the best combination of loan terms and interest rates for your situation. It gives you options instead of just taking whatever rate the dealer happens to offer you.
New-car dealers and manufacturers can offer some enticing ways to get you to buy their cars, trucks and SUVs. They usually offer huge discounts off the full sticker price, along with various incentives for loyalty. Some offer extra money on your trade-in. But when it comes to financing, you usually have to make a choice. You can either get all those incentives, or you can get low- or no-interest financing instead. It’s either/or, not both.
When you get a loan from a bank or credit union, though, not only will you have shopped around for the best interest rate you can find you’ll also have all those incentives at your disposal. It can be a cleaner, simpler way to negotiate a car purchase, letting you focus just on the purchase price of your vehicle instead of stepping into the muddy waters of dealer or manufacturer financing.
And you can do the math to see if you’re really getting a better deal. You can use an interest-rate calculator online to compare how much interest you’ll be paying over the life of your car loan to the incentives you’ll be missing out on if you choose zero-interest financing from the dealer.
Given today’s low interest rates, it’s often a much better deal to get a loan from a bank or credit union before making your vehicle purchase.