Most car dealers have a finance person who is happy to arrange an auto loan for you once you have reached a deal on a new vehicle. Dealerships make money from various sources, like extended warranties and aftermarket add-ons, not just from the car sale. Financing is another way in which they wring extra profit from you, according to Edmunds automotive site editor Philip Reed. Prevent this by getting your own loan before you car shop.
Reason to Finance First
You can easily find out the invoice price of the vehicle makes and models in which you are interested by doing some online research. Websites like Edmunds and Kelley Blue Book provide this information for free and let you look up current rebates and direct-to-dealer incentives. You may negotiate a great price on your chosen vehicle, but Reed warns that you may get overcharged on interest because the finance department adds some points for profit. This cannot happen if you are pre-approved for financing from an outside source.
Pre-Approved Vehicle Financing
Many financial institutions offer pre-approved vehicle financing at competitive rates. Credit unions tend to offer lower interest rates than banks, according to Dana Dratch of the Bankrate.com financial site, and online lenders and even some car insurance companies finance vehicles at good terms. Confine your loan shopping to a two-week period so credit scoring firms count the multiple inquiries as a single credit check. Otherwise, your score can drop many points.
Process
Do not tell a car salesperson you already have vehicle financing before you start price negotiations. Dealerships are sometimes reluctant to give really good deals if they know there is no possibility of recovering some of the lost profit by arranging your loan. Simply state that you want to negotiate based on total price, not on monthly payments. This is a good strategy even if you do intend to use dealer financing because salespeople can disguise a high total price more easily by breaking it down into payments. Dealers also extend the loan length to make payments lower, the Lendingtree financing site warns, which means you pay more interest.
Considerations
Car manufacturers sometimes offer special financing terms to attract buyers. For example, you might be able to get a single digit interest rate, or even zero percent interest, if you buy a certain model. Finance through the dealer if you can get a manufacturer-subsidized loan that beats bank and credit union terms. You need an excellent credit rating to qualify for low promotional rates, the BCS Alliance advises.
Warning
Never get a car loan that lasts longer than 48 months, consumer radio host Clark Howard advises. Financing that lasts 60 months or longer puts you in a bad position because your vehicle's value drops more quickly than your loan balance. You owe more than your car is worth in the loan's later years, which means you must pay or finance the deficit if you need to buy a new car before your loan is paid in full.
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