Houston, Texas, USA: You’ve shopped for your auto loan. Now it’s time to negotiate your loan terms. When you look for a vehicle, you may know that you can negotiate the vehicle’s price, but did you know that you can also shop around for and negotiate the terms of your auto loan? Shopping for loans and trying to get the best rates and terms, while complicated, is like other types of comparison shopping. Shopping and negotiating can save you hundreds or even thousands of dollars over the life of your loan.
Know what is negotiable
While you may know that you can negotiate over the price of the vehicle and the interest rate, it’s also important to know all the factors that you can negotiate over that may impact the cost of your auto loan. You should consider all these factors when you buy and finance a vehicle.
In addition to the price of the vehicle, here are some other terms or costs that you can negotiate:
Trade-in value (if you trade in your vehicle) and down payment amount
Annual Percentage Rate (APR) and interest rate
Length of loan
Whether or not there will be a prepayment penalty
Price of optional features and services for the vehicle or the loan such as extended warranties, credit life insurance, GAP insurance, alarm systems, tire and wheel protection, window tinting, and other products
Fees charged by the dealer such as dealer preparation fees, delivery charges, and document fees
You cannot negotiate taxes, vehicle title, and registration fees. These fees are set by your local or state government.
Be cautious of some biweekly payment plans
It is possible to be offered an auto loan with biweekly (every 2 weeks) payments instead of monthly payments. This may make the loan look more affordable than it really is because of the smaller payment. There also may be additional fees charged for enrolling in a biweekly payment plan. If your loan has biweekly payments, there will be some months when you will have three payments instead of two. This is because there are 26 biweekly payment periods every year, the same as if you were making 13 monthly payments instead of 12. Make sure that you know whether your loan payments are monthly or biweekly, and factor the extra biweekly payments into your budgeting if you make this choice.
Negotiate to lower the total cost, not just the monthly payment
When you are looking for a loan, you may find it easy to focus just on the monthly payment or the price of the vehicle. But looking at just one factor doesn’t give you the whole picture. A lower payment doesn’t necessarily mean a lower interest rate; it might just mean that you are paying for a longer time. The best way to compare auto loans is by using the total cost of the loan. Your total loan cost starts with the amount financed. The amount financed is the amount of money you are borrowing. It includes the price of the vehicle, taxes and other government fees, as well as any optional add-ons like extended warranties and optional credit insurance, minus your down payment and any trade-in amount.
The amount financed does not include the cost to borrow the money. That cost is known as the finance charge and includes interest and certain fees over the life of the loan. Your total loan cost is the amount financed plus the finance charge. By negotiating for better terms on your loan, you can reduce the total amount of money you pay over time.
For example getting a lower interest rate means you will pay less to borrow money. The total cost of your loan will be lower. A shorter loan term (in which you make monthly payments for fewer months) will lower your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan. A higher down payment, or a higher price for your trade-in, will reduce the total amount financed because you will have to borrow less money. Optional add-on products like extended warranties, GAP insurance or credit insurance that are added into your loan amount will increase your total cost because you will be borrowing more money.
Keep track of multiple factors while negotiating
When you are negotiating for financing with a lender or at a dealership, make sure you are keeping track of all the factors that go into the total cost of the loan. If you are negotiating the interest rate, make sure that you also know the length of the loan and other terms. Comparing total loan cost will help you keep an eye on these multiple factors.
Ask the dealer to tell you the price, trade-in amount, interest rate, term of loan, estimated monthly payments, and write these numbers down. It’s best to get these numbers early in the process, so you can better compare and negotiate.
Just as the first price you are offered for the vehicle may not be the lowest price available to you, the first rate for a loan the lender or dealer offers you may not be the lowest rate you qualify for. If the lender or dealer agrees to a better loan feature (such as a lower APR or interest rate), check to make sure that the other factors like the length of the loan or the amount financed haven’t changed. A lower
Monthly payment doesn’t necessarily mean a lower interest rate; it might just mean that you are paying for a longer time.
After you’ve agreed on the price of the vehicle, here are some additional tips to help you negotiate the best loan:
Know what your trade-in is worth and bargain over the amount you will get for your trade-in. This will reduce the amount you borrow.
Negotiate over the interest rate for your loan, comparing interest rates obtained from your bank, credit union, or other lender with the rate you are offered by the dealer.
If the dealer is arranging your financing, make sure you understand how the interest rate was determined and ask if your credit score qualifies you for a loan with better terms.
Strengthening your position at the bargaining table
You are not required to get a loan from a dealer or trade in a vehicle in order to purchase a car from a dealer. A bank, credit union, or other lender may offer you better loan terms than the dealer. Bringing a loan quote or preapproval from another lender to the dealer can place you in a stronger bargaining position to negotiate good financing terms with the dealer. Then you can decide which loan to accept.
Closing the deal
You’ve now negotiated your auto loan. Before you drive away, make sure everything matches what you agreed to. Review the paperwork, check the final terms and numbers against the auto loan worksheet, and be fully satisfied that the written deal is what you want.
Verify that you get what you agreed to
Before you are legally obligated under the loan, lenders are required to give you specific disclosures in writing about important terms. This requirement is contained in the federal Truth in Lending Act (TILA). One purpose of TILA is to help consumers make apples-to-apples comparisons between loans. The important terms include:
Annual Percentage Rate (APR): The APR is the cost of credit expressed as a yearly rate in a percentage
Finance charge: Cost of credit expressed as a dollar amount (this is the total amount of interest and certain fees you will pay over the life of the loan if you make every payment when due)
Amount financed: The dollar amount of credit provided to you (this is normally the amount you are borrowing)
Total of payments: The sum of all the payments that you will have made at the end of the loan (this includes repayment of the principal amount of the loan plus all of the finance charges).
The TILA disclosure will also include other important terms such as the number of payments, the monthly payment, late fees, whether the loan has a variable rate, and whether you can prepay your loan without a penalty.
It’s ok to walk away if you feel uncomfortable
If you are not comfortable with any aspects of the loan or the process, you can always leave without completing the deal. Take time to think it over and come back another time. No one can make you accept financing or a vehicle that you are not satisfied with.
Make sure you have a copy of all the documents
Before you drive off with your new vehicle, make sure that you have a copy of all documents that both you and the dealer have signed and that all blanks are filled in. Some dealers will allow the customer to take possession of the new vehicle before the loan is approved by the lender. This practice, called spot delivery, could put the deal that you thought you had at risk. By having a signed contract with all terms finalized, you can avoid potential problems.
Nail down the financing before you sign the contract
Make sure that the financing is nailed down before you sign the contract. If you don’t have the financing nailed down, the dealer may ask you to come back in and sign for a higher interest rate, add a co-signer, or make some other change different from what was agreed. You don’t have to agree to a second deal. If this happens and you don’t agree to a second deal, the dealer will have to unwind the sale and give you back your trade-in and down payment.
In some cases you may want to seek legal assistance and file a complaint with your state attorney general or consumer protection office
Pay attention to the details after you drive away
After you take out a loan, you should receive an introductory letter from the lender that provided the financing. This letter will include important information related to your loan such as where to send your payments and payment due dates. Make sure to make your monthly payments on time to avoid the cost of late fees and the possible repossession of your vehicle, as well as negative entries on your credit report