Updated: 11/1/2011 2:27 PM ET|
10 steps to the best car loan
re you feeling like a savvy negotiator because you've persuaded a dealer to sell you the car you want at the price you want? Good for you -- but you're only halfway done.
Negotiating a great price on a new car is just half the battle. You also need a great car loan to make it a great deal.
Here are 10 tips to help you get the best auto loan:
1. Shop the loan separately from the car. Before starting negotiations on the exact car and price, begin the loan application process with a credit union, a bank, a well-respected online lender or even your auto insurance company.
"Generally, we've seen that online banks have been the best," says Anthony Giorgianni, the associate finance editor of the Consumer Reports Money Adviser newsletter in Yonkers, N.Y. "The little banks might be very competitive. A lot of them didn't get caught up in the credit crunch."
And credit unions' rates tend to be about 1 to 1.5 percentage points lower than banks', says Jim Hanson, a vice president at the Credit Union National Association in Madison, Wis.
You can get prequalification for a loan, which would enable you to go to the dealer with a blank check -- good up to a specified amount, says Phil Reed, the senior consumer-advice editor for Edmunds.com. Once you have a solid, written contract, only then ask the dealer if it can beat the financing deal you already have.
2. Limit your loan shopping to a two-week period. Every time you apply for a loan -- whether you are approved, whether you use it -- your credit scores go down, making it slightly more difficult to get a prime-rate loan. But if you make all of your applications within two weeks, they count as only one inquiry.
3. Get familiar with your own credit history. Get free copies of your credit reports from Equifax, Experian and TransUnion, the three major U.S. credit reporting companies, at AnnualCreditReport.com. If you want to learn your exact scores, you can order them for small fees from the companies' websites. The scores you buy are probably not the same ones your lender uses, but they should be close.
With an auto loan, you have a little more wiggle room in terms of your credit scores. "What's considered good for a car loan will be a little lower than what's good for a mortgage," says Gail Hillebrand, a senior attorney with the San Francisco office of Consumers Union, an advocacy group.
4. Shop the total loan amount, not the monthly payment. The only time you should consider the monthly payment is when you privately calculate how much you want to spend for your car. After that, don't discuss monthly payments. Some lenders may focus on the payments to induce you to borrow more money by extending the number of months you pay. That way they make more in interest, and you have to drive your aging car longer.
5. Don't assume the best. Lenders aren't obligated to offer you the best rate for which you qualify. In 2007, car dealers marked up loans by an average 1.8 percentage points on used cars and 0.6 point on new ones, according to Josh Frank, a senior researcher for the Center for Responsible Lending in Durham, N.C.
Let the lender know you're shopping around or already have another offer. You're more likely to see a better rate.
6. Get the right tools. What's better for you -- low dealer financing or a cash rebate? You can get a quick answer to that by using Bankrate's rebate calculator. Within a few seconds, you'll know to the penny which is the better deal. Usually, it's the cash, Giorgianni says.
7. Read the fine print. Take the loan paperwork home and read it before you sign anything, advises Massachusetts consumer attorney Yvonne Rosmarin. If a lender or dealer balks at that, walk out. This is a binding agreement that's going to last for years, so you need to know exactly what's in it.
Some points that warrant special caution:
- Mandatory binding arbitration: "It takes away your right to go to court for anything," says Rosmarin.
- A variable interest rate: Figure out the highest possible payment. If you can't afford it, the loan's not for you.
- Prepayment penalties: How much will it cost you to pay off the loan early if you want to sell or refinance?
- Is everything the lender promised in the contract? Oral promises are hard, if not impossible, to enforce, Rosmarin says. If there's something missing that's important to you, don't sign until it's included. If it's work that's promised, don't sign until it's completed.
8. Check the math. If the monthly payment is even slightly different from your calculations, the loan might not have the terms you think you negotiated. Use Bankrate's auto-loan calculator to double-check.
9. Avoid conditional financing. Never take a car from a dealer until the financing -- down payment amount, interest rate, length of loan, monthly payments -- is completed. If the financing is "contingent" or "conditional," it can change later, and you could get stuck with less advantageous terms.
10. Investigate your lender. "Check on anyone you're dealing with," Rosmarin says. Try the Better Business Bureau, your state attorney general's office and consumer-affairs office or any other government agencies (state or federal) that regulate lenders. Search online to learn what customers and former customers are saying. Though you should take online comments "with a grain of salt," Rosmarin says, they can also provide an early warning to possible problems.
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