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Most of us don't have the money in hand to buy a car outright. We may have some to put down on the car or a trade that has value, but we have to get a loan to cover the rest. I have literally financed 10 cars in my 23 years of existence, so I'm well aware of how this process works. I figured it was about time for me to share my knowledge with the world.
Before you get suckered into a bad deal, you need to know what to look for in an auto loan. Who can you trust? When should you buy? What are your options? I'll answer those questions and more below. Here are the ins and outs of car financing.
Bad Deals Are Everywhere
From March 2012 to March 2013, the U.S. Consumer Financial Protection Bureau has received 1,585 complains about auto financing. That means that over 1,600 people in a single year have taken time out of their lives to launch a federal complaint about the treatment they have received from their lenders. Everyone is at risk of a bad deal. That is why it is so important to know what to look for early on. Hopefully you won't be part of the complaint batch for next year.
What to Look for in a Car Loan
Most people simply look for the cost of their car payment when they go to get a loan for a car, without realizing what the long-term costs may be. The $50 you save with one place a month may lead to $5,000 in interest charges at the end of your loan. It's completely appropriate, and usually expected, to negotiate the terms of a car loan. Here are some factors to keep in mind:
- Interest rate: Some lenders will have better interest rates than others based on your credit. In most cases, look for the lowest interest possible.
- Loan terms: Most lenders will finance a car for 36 to 60 months, again depending on credit. Short terms are going to save you money in interest, but they will raise your car payments. Ideally, look for the shortest term you can logically afford if you want to save money.
- Trade value: If you are trading in a car, make sure the dealership is giving you a good deal. They can't give you the retail value of the car, but they should offer something close to the trade value on NADA guides or Kelley Blue Book. If your car is undervalued, stand firm with what you want.
- Monthly payments: Of course, you need to make sure you can afford your car loan payments. Otherwise, you risk having your car repossessed. If you can't lengthen the loan to lower the payment, consider putting more money down.
- Down payment: If you are required to put money down on the car, make sure your loan payments reflect that. The more money you put into the loan at first, the less you should have to pay in the end.
- Tags, title and taxes: Check whether or not the cost of your tags, title and taxes will be included with the loan. This will raise the cost of the loan, but it will save you from having to buy those things right away.
Quite frankly, you need to know what is going on with your loan down to the very letter. If you don't, you could easily get taken advantage of by a lack of preparedness.
Different Ways to Get an Auto Loan
There are several ways to go about getting money for a car. One may work better for you than the other. Here are some common options:
You find a lender
This option involves you actually going to banks on your own and trying to get a good deal. This puts more work on your shoulders, but it allows you to gain leverage over the dealership. When you get to the lot, you can say that you've been pre-approved for X amount, and they will be forced to work around your loan terms. If you have a bank that you have been with for a while, try them first. Then ask around to see if anyone else has better financing solutions for you.
The dealership finds a lender
In this case, you will fill out a single application form and the finance department at your dealership will search for a lender for you. A lot of people like this because it is simple and convenient, but it could lead to trouble. Most dealerships will send your single application to a handful of lenders at once, hoping someone will be able to work with it. All those credit pulls will lower your credit score. Try to make sure the finance director reviews the application and only sends it to one or two banks. You might be shooting yourself in the foot if you just turn things over to him or her.
The dealer is the lender
Ever heard of in-house financing? That's usually considered a last resort. With this option, the dealership provides a loan on the vehicle because there are no banks that can. Low-end dealerships often do this because they can charge ridiculously high interest rates and get away with it. They work with people who have bad credit or no credit at all and cannot be financed through traditional lenders. If you are in a desperate situation, consider a "buy here, pay here" loan. Explore all other options ahead of time though.
How to Negotiate a Good Deal
No matter what route you take with your car financing, you need to know how to talk your way into the best deal possible. Here is a crash course in auto loan negotiation:
- Know the retail value of the car. Check NADA guides orKelley Blue Book to find out what you should be paying and let the dealership know if they're charging you too much.
- Know the trade value of your own car. If you're trading your car in, use the same resources from above to confirm what your car should be worth as a trade.
- Have an approval on standby. If you are going to get the best deal possible, find a lender that will work with you no matter what. Then you can use their rates to threaten to take your loan elsewhere.
- Don't settle because you're impatient. It may take a few hours or even a few days to get the right loan worked out. Don't put yourself in a bind just because you're tired of waiting.
- Stay firm but logical. You can't be afraid to stick to your beliefs, even if that means walking away from a deal entirely. Just make sure that your expectations are within reason.
- Just leave. If the deal's not right, the deal's not right. There are going to be other cars out there just like the one you fell in love with. You can't risk your finances because you're unwilling to look.
The second you become desperate, the dealership or lender is going to take advantage of you. The next thing you know, you'll be filing a complaint because of false information or a lack of customer support. Don't let yourself be a victim to bad terms. Take the time to find the best deal possible, and you will be on the good side of car financing.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.