You’ve dreamed of a new (or slightly used) car for years. You have a down payment together and are finally ready to take the plunge. You see an ad from a local dealership touting a “special” interest rate and you’re like, “Wow. I will never find a better rate than this! ”
Not so fast.
Take a quick tour of car dealerships from the comfort of your keyboard. Check their “special” interest rates. Do you notice a trend? The rates vary to such an extent that it looks like they’ve been pulled out of a magic hat.
Could it be that the interest rates are just a suggestion?
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How it works
Financing through a dealer works as follows: they collect information from you and pass it on to one or more potential lenders who prepare a credit report. Based on your report, potential lenders either decline to fund the loan or offer an interest rate, also known as a “buy rate”.
The rate you get depends on many factors, including your credit score. And the rate the dealership offers you may be higher because it includes additional fees to pay the dealership for handling your financing. And that’s where the leeway comes in. The dealer can reduce this initial compensation by lowering your interest rate.
Prepare to negotiate
Get your financial situation in order before you buy a car or any other loan for that matter. You can only negotiate in a position of power when lenders want you as a customer. Follow these four steps to get the best deal:
1. Make sure your credit is strong
The higher your credit score, the greater your ability to access the best interest rates. For example, a buyer with a strong credit score of 750 and above will have better access to low interest rates than a buyer with a rating of 680.
Request a copy of your credit report and if your score is not as high as it should be, take the time to improve it. Even if improving your score means waiting another 12-18 months to buy a car, the best rates will pay off for years to come.
If your credit isn’t good, but you’ve saved enough for a down payment and absolutely need a vehicle today, ask a trusted friend or family member to co-sign for you. This is a big request because your cosigner credit score will be damaged if you don’t keep up with your payments.
Consider the difference between new vehicle interest rates as of September 2019. A credit score of 750 or higher would get you an interest rate of 4.3%, while a credit score of 650-699 would mean paying an interest rate of 7.65%. A vehicle of $ 36,000 at 4.3% for 60 months would cost $ 668 per month. The same 7.65% vehicle would cost $ 724 per month, a difference of $ 56 each month, or $ 3,360 over the life of the loan.
2. Have a pre-approval letter ready
You can save yourself the hassle of trying to figure out the dealer’s buying rate and what it adds to your costs by going directly to a bank or credit union to get loan approval. Do this before you even walk into the car dealership, as this will give you additional leverage during negotiations.
Be aware that your credit score will take a slight hit during a thorough check. However, it is also normal to seek a loan, so all inquiries within 30 days count as one request for credit rating companies.
After a bank or credit union has managed your credit, the interest rate offered is the actual rate and will not include the markup often found at dealerships. Helpful tip: Since these are non-profit organizations, credit unions generally offer lower interest rates than banks.
Just because you have a pre-approval letter does not mean that you are committed to accepting this loan. But you might find that once you tell the dealership you don’t need their financing, they offer a good rate on their own.
It pays to shop. Getting a good deal on a car leads to a smaller loan, less interest, and the ability to pay off the bill faster. You can’t get as low an interest rate as you would like, but you can fight for a lower price on the car. If you like to haggle, use this skill. If you don’t, bring someone who does.
3. Take advantage of automatic payment discounts
Many lenders offer a discount on interest if you sign up for automatic payments. Their rationale is that you are more likely to pay on time if they withdraw the payment from your account on the same day each month.
The discount is normally small – usually around 0.25% – but it can add up. For example, let’s say your loan is $ 20,000 and the interest rate without automatic repayment is 5.5%. You take out a 60-month loan and have a monthly payment of $ 382. The same loan with a 0.25% discount saves about $ 3 per month, or $ 180 over the life of the loan. It may not seem like much, but the savings are enough to change your car’s oil four times.
Take the technique on the road
As long as your financial loopholes are lined up, you can negotiate any loan, including a mortgage or a personal loan. Lenders need qualified customers to borrow in order to earn profit. Your job is to make yourself so qualified that they will agree to your terms.
When it comes to auto loans, here’s how to get the best interest rate in a nutshell:
- Get a copy of your credit report. If there are any errors, have them corrected. If possible, take steps to increase your credit score before purchasing a new vehicle.
- If you absolutely need a car today but have poor credit, consider hiring a co-signer to improve your score.
- Get pre-approved for a loan from a bank or credit union. Have the pre-approval letter with you when you visit the parking lot.
- Negotiate the price of the car vigorously. In 2018, there were 16,753 franchised auto dealerships in the United States. If the first dealer refuses to budge on the price, another may be more receptive.
- Take advantage of the automatic payment discount.
If your credit score is strong, it’s because you worked hard to get there. Take advantage of this fact by working with a lender who respects your relationship with money and values you enough to offer you the lowest possible interest rate.