When you’re in the market for a new car, it’s easy to get caught up in finding the best deal for the vehicle you want. But you also should be shopping around for the best deal on a car loan. This is often ignored in the search for a new car, but it can be just as important.
One key piece of advice: Get your financing in order before you visit the car dealership. This way, you won’t be vulnerable to whatever terms the dealer offers you. According to Consumer Reports, dealerships often mark up the interest rate of a loan, costing you potentially hundreds of extra dollars.
Keep your eye on the big picture
When applying for a car loan, don’t focus only on the monthly payment you can afford. Look at the total cost of the loan as well. This way you’ll most likely end up with a better deal. Of course, you need to sign on for a loan that fits in your monthly budget, but knowing the big picture is very important.
APR: The annual percentage rate is a very important figure to look at when comparing loans. Interest often sounds small when looking at a monthly payment, but when you add up interest over the life of a loan, the savings can be huge. For example, a three-year, $15,000 loan at 5% APR would save you nearly $500 overall, compared with the same loan at 7%.
Loan duration: The length of the loan is another important consideration. Most car loans are three- to five-year loans. If you have a loan for three years, your monthly payments will be higher, but you will save money in the long run because you won’t have to pay extra interest for those two tacked-on years. So, if you can afford the monthly payments, a shorter loan is more beneficial. Also, longer loans often have higher interest rates.
Don’t get upside down: Another advantage of a shorter loan is you will build equity faster, which can be important if you want to trade in the car or sell it. You’ve probably heard the term being “upside down” on a house, meaning you owe more to the bank than you can sell the house for on the market. The same ideas applies to a car loan. Just like a house, you can be upside down on a car, meaning you owe more than the car is currently worth, and that’s not a good position to be in if you can help it.
Down payment or trade in: You can also avoid being upside down by making a down payment or trading in another car when you purchase your new car. Consumer Reports recommends a trade-in or down payment of at least 15% of the total cost of the vehicle.
Where should you go to get a car loan?
It is sometimes possible to get the best loan deal directly from the dealership, but walking in to buy a car with financing already in hand can provide leverage and flexibility. In addition, it can help you avoid the pricing confusion that can occur when the vehicle price is mixed in with financing details. Conflating the two to confuse the buyer is a potential sales tactic.
Search online for rates and rebates: You can start your search at SuperMoney.com, where you can find the current average loan rates nationally and read customer reviews from a variety of lenders. You can also plug in your ZIP code on a site such as TrueCar.com and see whether there are any special rebates in your area. However, many local lenders won’t show up online, so it’s a good idea to shop around at your local banks and credit unions too.
Visit your local bank: Banks often require a higher credit score than a dealer might, but they will often have the best rates. You can check the rates on their websites, but it’s a good idea to visit the bank in person and talk to someone if you’re interested in applying for a loan.
Check out credit unions: Credit unions may have even better rates than banks, because they are nonprofit institutions, but you need to be a member of a credit union to receive a loan. Joining a credit union for a good rate on a car loan might be a good decision. Many people are joining credit unions to take advantage of loan policies and also to separate themselves from big banks that didn’t behave admirably during the downturn.
Research online lenders: Online lenders often have competitive rates, and all of your interactions with the lender will be conducted remotely. Some people prefer to work with someone in person and some prefer the ease of doing everything from the comfort of a computer. APRs and necessary credit scores will vary by lender, but it’s fairly easy to do a search.
See what your dealership offers: It can be very convenient to simply get your loan at the dealership where you purchase your car. And you may decide to end up doing that. But come into the dealer armed with loan information from other sources, so that you have options.
What to do next
Once you know what you’re looking for when it comes to auto loan financing, you are better prepared to find the car you can best afford and still love. Arrive at the dealership with your financing in place and know the exact amount you can afford to spend on a car payment each month. To help with loan calculations and more, visit our auto loans overview.
Heather Skyler writes about business, finance, family life and more. Her work has appeared in numerous publications, including the New York Times, Newsweek, Catapult, The Rumpus, BizFluent, Career Trend and more. She lives in Athens, Georgia with her husband, son, and daughter.