Houston, Texas, USA: While many Americans shop around for the best deal they can get on their vehicle, not everyone shops for the best auto loan. It is important to focus on the total cost of the loan, and not just the monthly payment. Preparing ahead of time and knowing how to navigate the process can help you save money, reduce stress, and get the auto loan that’s right for you.
Budgeting for your auto loan
Make sure you have a realistic budget before shopping for an auto loan. If you have a realistic budget, you have a better chance of ending up with a loan you can afford and pay on time. You will also be more likely to account for ongoing costs, such as vehicle maintenance and insurance.
You will want to be sure that your budget will support both the loan and the other costs of ownership. If you are having trouble coming up with a budget that works for you, think about ways that you can reduce the cost of your auto loan, such as saving for a larger down payment, buying a less expensive vehicle and getting fewer features or options.
Determine how much loan you can you afford
Before you start the process of getting a loan, see how much you can afford. Make sure you have a realistic budget before shopping for an auto loan. Research what type of vehicle fits into your budget. There are numerous publications and websites that discuss features and prices. The Federal Trade Commission (FTC), Consumer Reports, Edmunds, Kelley Blue Book, and NADA Guides are just a few examples.
Look beyond the monthly payment
Many people think about a loan in terms of the monthly payment. Be careful here. The total cost of the vehicle financing matters. If you lower the monthly payment by taking out a longer loan, you pay more in interest. A longer loan also puts you at risk for negative equity over a longer period of time, which is when you owe more on the vehicle than the vehicle is worth.
Factor in all the costs of ownership
Remember to factor in the other costs of ownership, such as additional costs at the time of purchase (state taxes, title fees, and dealer fees) and ongoing costs throughout the time you own the vehicle (insurance, gas, annual registration fees, maintenance, and repairs).
Consider the resale value of your new vehicle
Another factor in your budgeting is the resale value of the vehicle that you are considering purchasing. A vehicle loses value over time. If you sell or trade in this vehicle in the future, the value of the vehicle and whether you have paid off the loan before you want to sell it or trade it in will be an important factor in what you can afford.
Understanding your auto financing choices
While some consumers are able to pay cash for their new vehicle, most consumers use financing. Understanding the loan process and knowing your choices will help you save money. For example, bringing a loan quote from a bank, credit union, or other lender to the dealer can place you in a stronger bargaining position to negotiate good financing terms with the dealer. Then you can choose whether you stick with the offer you brought in or accept the dealer’s financing.
Know the sources of auto financing
You can shop around for auto financing even before you shop for a vehicle. Banks, credit unions, and dealerships are the most common places to finance an auto loan. While shopping for auto loans is complicated, finding and comparing your choices can help you improve the deal that you will get. Consider getting one or more loan quotes from a bank, credit union or other lender before going to the dealership. It will put you in a better bargaining position and could save you hundreds or even thousands of dollars over the life of your loan.
Auto loans from a bank, credit union, or nonbank auto finance companies
You can obtain a quote or preapproval on an auto loan from a bank, credit union, or other lender before selecting a vehicle. You can also check out nonbank lenders and online lenders as potential lenders. Although it might be helpful if you already have an established relationship with a lender, you don’t have to have an account with these lenders in order to apply for an auto loan. These lenders can “preapprove” you. The preapproval will give you a loan quote with an interest rate, loan length, and maximum loan amount based on your creditworthiness, the terms of the loan, and the type of vehicle you have in mind. The rate and terms you areoffered may be negotiable.
Here you obtain financing from a lender through a dealership. With dealer arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. If the lender(s) agrees to finance your loan, they may authorize or quote a rate to the dealer to finance the loan, referred to as the buy rate. The interest rate that you negotiate with the dealer may be higher than the buy rate because it may include an amount that compensates the dealer for handling
the financing. Dealers may have discretion to charge you more than the buy rate they receive from a lender, so you may be able to negotiate the interest rate the dealer quotes to you. Ask or negotiate for a loan with better terms. After the auto purchase is finalized, a dealer-arranged loan may then be sold to a lender who has already indicated a willingness to extend the credit. That lender may own your loan and collect the monthly payments, or transfer those responsibilities and rights tooth er companies.
“Buy Here Pay Here” dealership financing
Some types of dealerships finance auto loans “in-house” to borrowers with no credit or poor credit. At “Buy Here Pay Here” dealerships, you might see signs with messages like “No Credit, No Problem!” The interest rate on loans from these dealerships can be higher than loans from a bank, credit union, or other type of lender. You may want to consider whether the cost of the loan outweighs the benefit
of buying the vehicle. Even if you have poor or no credit, it may be worth it to see if there is a bank, credit union, other lender, or another dealer that is willing to make a loan to you. A feature of this type of dealership is that your monthly payment is made to the dealership. Some “Buy Here Pay Here” dealerships, and some other lenders that lend to people with no credit or poor credit, may put devices in the vehicle that help them repossess or disable the vehicle if you miss a payment.
In general, lenders and dealers are not required to offer the best interest rates available. You may be able to save a lot of money over the life of the loan by negotiating the interest rate with the lender or dealer.
Understand how leasing works
Leasing is an alternative that some people choose. A lease is an agreement to pay to use a vehicle for an agreed number of months and/or miles. If you lease a vehicle, you do not own it and you will be required to return the vehicle after the lease ends, unless your contract includes a purchase option and you choose to pay to exercise that option. If you are considering leasing, carefully compare the costs of leasing and buying.
Shopping for your auto loan
Shopping for loans and trying to get the best rates and other terms, while complicated, is like other types of comparison shopping. Shopping ahead of time will get you ready for negotiating your auto loan and make the process less stressful.
Check your credit report
The information in your credit report determines your credit scores. Your credit score plays a large part in determining what kind of auto loan you can get, and how much interest you will pay for the loan.
Check current auto loan interest rates
You can research rates by contacting several banks, credit unions, or other lenders. You can also look online at many commercial sites which may give you an estimate of interest rates nationwide and by your zip code. Some commercial sites will link you to specific lenders and dealers for estimates, so you may want to be careful about entering your personal information.
Consider a down payment
A down payment will reduce the total amount that you finance because you will have to borrow less money. The larger the down payment, the lower the total cost of the loan.
Decide if you want to trade in your current vehicle
If you already own a vehicle, research its value to see how much you might get from a trade-in or private sale. You can look up the approximate value using online commercial websites such as Consumer Reports, Edmunds, Kelley Blue Book, NADA Guides, and online classifieds. These resources may also be available atyour local library. Finding examples of similar vehicles that have sold recently in your area will help you know a fair price. Once you know approximately how much your current vehicle is worth, you can decide whether to trade it in or sell it yourself. If you trade it in at a dealership, you and the dealer will decide on the value that will be credited towards the purchase price of your next vehicle. If you sell it yourself, you can use the money you get as a down payment.
If you have an existing auto loan on your trade-in, consider your situation carefully
Carefully consider whether to take on new debt in addition to your existing debt. Here are some considerations and steps:
Get the payoff amount, which is the amount to pay off the existing loan, from your current lender before going to the dealership.
Decide if you are going to pay off your existing loan now, wait until you pay off your old auto loan before you borrow for another vehicle, or include the amount that you still owe on your current vehicle in your new auto loan.
If you owe more on your current vehicle than it is worth — referred to as being upside down — then you have negative equity. If you roll the balance of your existing auto loan into your new auto loan, this could make the new auto loan much more expensive. Your total loan cost will be higher because you will be borrowing more than just the price of your new vehicle.
After you research your trade-in’s value, if the amount you still owe on your trade-in is less than it is worth, make sure during any negotiations that you consider whether you are getting fair value for your trade-in and you are able to fully pay off the old auto loan.
Think about optional add-ons ahead of time
When you go to an auto dealer, you will likely be offered add-on products and services for the vehicle or for the loan. It’s a good idea to think about these add-ons ahead of time, so that you have less to worry about at the dealership, and have your answers ready when you are asked to buy these extras. Common add-ons include: Service contracts or extended warranties, Guaranteed Auto Protection (GAP) insurance, Credit insurance, Additional features for the vehicle, such as alarm systems, window tinting, tire and wheel protection, and other products.
These products and services, which you may finance, are optional. If you buy them the price is negotiable. If you think you want to buy these products or services shop around. For example, your own auto insurance company may offer GAP insurance, credit insurance, or other alternatives.
If you finance optional add-ons as part of your loan, the amount you borrow and pay will increase.
Get preapproved for a loan
Getting a preapproved loan offer or quote with a maximum loan amount and rate from a bank, credit union, or other lender is a good place to start. If you bring a loan quote from a lender to the dealer, you may be in a stronger bargaining position to get a better deal, whether you stick with the offer you brought in or you decide to accept the dealer’s financing offer.
Preapproval also helps you stay within your budget and allows you to compare interest rates without the time pressure you may feel once you are at the dealership. Then at the dealership you can focus more on the actual price of the vehicle and your trade-in because you will already know about the loan terms that you could get. You will still have the choice to negotiate a better loan at the dealership and not use your preapproval.
If your application is preapproved, the lender will give you documents to take to the dealership. Once you are ready to buy, the dealer will make final arrangements with your lender.
Understand how shopping for a loan impacts your credit score
Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Depending on the credit scoring model used, generally any requests or inquiries by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry. This means shopping around for an auto loan during that time span will count the same as applying for just one loan. You can minimize any negative impact on your credit score by doing all your rate shopping in a short amount of time.
How to figure out how much you can afford to borrow for an auto loan
Figuring out how much you can afford to borrow before you sign on the dotted line is a great way to stay in control of your finances. It can be very helpful to break the process down into several steps.
1. Assess your financial situation by creating a monthly budget
First, add up all of your fixed expenses (these include: rent/mortgage, utilities, phone and other recurring monthly bills, amounts you set aside for each month for savings, child support payments, insurance premiums, and payments on any existing loans including outstanding credit card debt).
Second, add up your estimated additional expenses for food, gas, entertainment, emergencies and unexpected expenses, and whatever else is not a set monthly expense.
Third, if you did not have a vehicle before, do not forget you will also have to pay for insurance, maintenance, and registration. Shop around for auto insurance before you shop for a vehicle, to get a sense of how that will affect your budget. If you are going from a used vehicle to a new vehicle, your insurance rates may be higher.
Fourth, if you will be trading in a vehicle but still owe money on it, be sure to find out how much you owe on that loan. If what you owe is more than the trade-in or private sale amount, you will need to account for how you will pay that amount. Your loan amount, monthly payment, and total interest cost will be higher if this old debt is rolled into the loan for your new vehicle.
Now, subtract all expenses from your take-home pay and any other income you receive on a regular monthly basis.
Your auto loan payment should be less than the amount you have left.
2. Review your credit
One of the first things you should do before applying for an auto loan is review your credit report at all of the largest consumer reporting agencies Equifax, TransUnion, and Experian. You are entitled to a free copy of your credit report from each of these agencies every 12 months, and you can request the free report at www.annualcreditreport.com or by calling 877-322-8228.
Review your credit report and dispute any errors that you find. A negative error on your credit report could affect the interest rate you get for an auto loan and cost you hundreds or thousands of dollars.
Any negative information on your credit report (such as late payments, delinquencies, court judgments and settlements, or bankruptcy filings) will influence your ability to obtain a loan or to obtain one at a low interest rate.
Most accurate negative information on your credit report must be removed after seven years and bankruptcy information after ten years. If you find a negative item on your report that should have been removed, you should dispute the error on your credit report.
3. Save for a down payment.
It is important to know how much of a down payment you can afford before you call around for loan quotes or go to a dealer. This will help you decide the size of the loan you can afford. Remember the more you put on a down payment, the less you will need to borrow.
4. Research loan options and consider getting prequalified or preapproved for a loan.
It is a good idea to shop around for a loan before heading to a dealer. You may want to consider getting prequalified or preapproved for an auto loan from a bank, credit union, or other lender before visiting an auto dealer.
Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Depending on the credit scoring model used, generally any requests or inquiries by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry.
This means shopping around for an auto loan during that time span will count the same as applying for just one loan. You can minimize any negative impact on your credit score by doing all your rate shopping in a short amount of time.
When you are offered different loans, compare all of the loan terms. You will look at:
The amount you will borrow;
The interest rate and the Annual Percentage Rate (APR);
The length or term of the loan (number of months);
The monthly payment (and whether youll be able to make that payment given your budget)
A higher interest rate or a longer loan term will result in additional interest costs for your loan.
Do not forget to read the fine print of any loan contract before you sign. Check to see if your loan has a prepayment penalty, which means that you will have to pay a penalty if you pay off your loan before the end of the loan term. Even if you are not planning to pay off your loan before the end of the term, you may want to avoid loans that have a prepayment penalty in case your situation changes. Check the amount you are borrowing to be sure it is the amount you expected. Check that you are getting the amount of credit you agreed on for your trade-in.