Having a vehicle is key, but for those who do not already own one, buying a new car can be expensive proposition. Rarely do individuals, or even households have the funds available immediately to buy a car outright. Thankfully there are no shortage of places willing to offer financing for customers to purchase their own personal vehicles
Choosing the right car and receiving a competitive price are just baby steps. One must also consider that the loans to finance these purchases vary greatly between lenders, and that the choices they make in this regard potentially represent thousands of dollars saved or lost. Intelligent borrowers not only receive a big discount, but can also gain the flexibility to switch vehicles mid-term, pay off their loan on an expedited (or lengthened) schedule, and more. Crucial to borrowing wisely is preparation, and there is a lot to consider even before starting the car search.
How to Approach the Search
Consider Credit: It is one of the most important things to think about, even before shopping for local lenders. A credit report and the corresponding score are by far one of the most important tools that lenders use to determine creditworthiness, and the loan terms they will (or will not) offer. Make sure to request up-to-date copies of the Equifax, Experian, and TransUnion credit report, which can either be done individually through their websites or with a credit reporting service. Many of the latter can deliver a full three-bureau credit report complete with scores within a single business day.
One might already be familiar with their credit score, which is used to determine mortgage rates and other financing terms, but it is important to note that the bar is set a bit lower for auto loans. Still, small dings in this credit history might prevent a lender from granting the best available terms, so it is recommended to remove any erroneous and potentially harmful entries from a credit report before beginning the application process. Credit repair services are extraordinarily capable of handling this task relatively fast.
Think Long Term: It is crucial for customers to consider how much they want to spend. Even more vital is that they do not think about it in terms of a monthly payment, but as a total sum – principal plus interest. It may be tempting just to consider the monthly expense, but because nearly any loan can become “affordable” simply by extending the term, this perspective can trick one into accepting an offer they cannot truly afford – and driving a car well past its prime.
Additionally, how long should one be on the hook with their lender? Auto loans usually last under seven years, but choosing a longer term may mean that the borrower is underwater (owing more than the car is worth) at the tail-end of the loan. It would also be wise to factor in maintenance and insurance costs into one’s calculations. These reflections should result in a realistic answer.
Finding the Best Lender
Only the Desperate Borrow from the Dealership: Rule number one for finding a good car loan is not to acquiesce by going for the loan that the dealership offers. It might seem convenient to get the car and loan at the same place, but convenience is about the only advantage. These loans are pricey and usually inflexible. In fact, it is best not to begin a discussion with any single dealer before all the other options are exhausted. Check local credit unions, Peer-to-Peer lenders, banks, online lenders or even auto-insurance companies first.
Shop Around: Banks cater more towards those borrowers with good credit and offer accordingly competitive loans. Most likely, people looking to get a car loan are already patrons of one or more banks, so this is a great place to start. Credit unions only extend loan offers to members, and this also helps them to provide economical financing, sometimes with interest rates even lower than what is available from the bank. Online lenders work similarly, but a degree of separation and lack of prior relationship with borrowers means that terms may not be as good. Regardless, arming oneself with a plethora of options before walking into the dealership means that customers hold the cards, and not the salesmen on the other side of the desk.
Conduct Proper Recon: With a wide variety of alternatives at a customer’s disposal, some due diligence should be done to determine how reliable these lenders are. Checking the Better Business Bureau is a good start. Customers should also try the state attorney’s office (or other institutional bodies that control lenders), online review sites and more.
Applying for the Car Loan
Equipped with a healthy credit report, a list of the best lenders and determination to do things the right way, the time has come to apply for an auto loan with each of these choices. Those who say not to apply for a loan from each available option are giving bad advice. It is entirely safe to apply for an auto loan at every lender on one’s list, if borrowers keep a few caveats in mind.
Stay Within the Window: The first is that there is a window during which the application processes should be completed. Typically, this window is two weeks, because every loan application dings the credit score a bit. Both successful and unsuccessful applications are a “credit inquiry” that temporarily lowers the credit score, but by completing all of one’s loan applications within two weeks, it only counts as a single inquiry.
Pre-Approval Only: Getting pre-approved for a loan at any of the lenders on the list of options is important for having added bargaining power. Most lenders that feel comfortable with the loan will prove it with pre-approval paperwork, which is a token representing a bulk amount they are willing to lend, regardless of the vehicle itself. Approaching any negotiation without pre-approval from other lenders will likely not end with the most favorable offer.
Avoid the Upsell: Those getting financing through a dealership need to understand that most of the profit that the dealer makes on their deal is on the loan, not the car. Therefore, most dealers will try to upsell the customers into extending the loan or taking a vehicle that is more expensive, and then justify it through some deft financial maneuvering. This is never a good idea, as loans that might seem affordable today can quickly turn a bank account inside-out.
How to Optimize the Auto Loan Being Offered
Play the Game: Using “open market” tactics is recommended when sitting down at the car dealership. Whichever dealer has the best price on any single car is unrelated to the quality of a loan they might offer on the same car, so creating competition is recommended. Do not approach the dealer without the pre-approval papers of other lenders, and it goes without saying that one should never accept an offer worse that what someone else might extend.
Read the Fine Print: Regardless of who the final lender is, one should always go through the contract with a fine-tooth comb. Some loans look great at first, but the fine print may reveal a lack of flexibility when it comes to repayment. Take the contract home and get a lawyer to look at it if possible. If a lender is not willing to comply with this request, then they should not be relied upon at all. Here are a few of the things to look for:
- Prepayment Penalties: This represents a potentially expensive downside for those borrowers wanting to practice diligence by paying off their loan before the set term. These prepayment penalties mean that paying in excess, or more frequently than what is originally agreed upon, punishes the borrower by assigning extra fees. While it is logical for lenders to want to drag out more interest, discouraging their borrowers from making good on their obligations can be a big red flag.
- Mandatory Binding Arbitration: Another one to avoid, this contract provision means that any disputes between the lender and the borrower must be resolved through an arbitrator instead of a court of law. Disreputable lenders often use this to prevent their borrowers from exercising their rights in pursuit of a fair agreement.
- Variable Interest Rate: While most auto loans are fixed-rate, some make use of variable rates – an APR that can increase or (rarely) decrease in the middle of a term. This is by no means a deal-breaker, but one should always calculate their monthly payments based on the highest rate or risk receiving an unaffordable loan
- Good Faith: It is not pleasant to consider, but what some lenders agree to might not make it into the physical contract. Whether through intent or accident, one should always check the final agreement for everything that was discussed during the loan negotiation.
Commitment Requires Finalization: Finalizing a loan means setting the agreed upon terms into stone in the form of the final contract. This could be the same one initially provided by the lender or the last of several drafts, but regardless, this document also needs to be checked thoroughly. The car should not be driven off the lot until the loan terms are finalized.
Some dealers make the auto purchase contingent upon gaining financing, which is no problem with proper preparation. However, others will say that financing is finalized when it is not. They might allow the customer to take the car home and then call to report some “trouble with the financing”, which pigeonholes the customer into accepting costlier terms or paying hefty fees for putting wear and tear on a vehicle that was never truly theirs.
Getting a fair auto loan might seem intimidating, but with a proper approach, the power is in the hands of the borrower. With a bit of work, a vast array of options present themselves, making what may have seemed like an obstacle in the road a hurdle that can be sped past with ease.