When it comes to buying a car, it’s not unusual to become fixated on negotiating the price of the vehicle itself, and take a less proactive approach to your financing. But unless you’re planning to pay for the entire cost of the vehicle in cash, this could be a misstep that may cost you thousands of dollars over the long haul. To help you secure the most favorable interest rate and terms on your next car loan, we’ve created a checklist of pointers to save you substantial sums:
Check your credit report and take steps to improve your standing, if necessary: Since your credit rating is one of the most important factors lenders use to determine what interest rates and terms they will offer you, it pays to ensure that yours is in the best possible shape before you start shopping for a loan. As the financial site Sapling points out, those on the lower tiers of credit score groups pay an average of approximately five times higher interest rates on auto loans than those with stellar credit. Credit scoring methods differ slightly from lender to lender, but a minimum general FICO score of 740 (out of 850) is usually considered to be super-prime (top-tier) credit.
Simple ways to boost your credit score:
In the months before you apply for a car loan, it’s a good idea to review your credit reports from the three national credit reporting agencies, Experian, Equifax and TransUnion. It’s not uncommon for companies to create errors in reporting your information to credit bureaus, which can potentially hurt your score. You’ll want to get any mistakes corrected before a potential lender runs your credit. During this time, it’s also critical to make timely payments on your bills, keep your debt levels as low as possible by refraining from unnecessary spending on credit cards and avoid opening new lines of credit.
Another effective way to improve your credit standing quickly is to pay down as much as reasonably possible on your credit card balances. This will lower your credit utilization (or debt-to-credit ratio), which is the amount of available credit you are using as compared to what is currently available to you. In general, you should aim to keep your credit utilization below 30 percent. Find a crash course on “Understanding Credit Utilization” at The Balance.
Shop around and arrange financing before settling on a car:
You can always wait until you get to a dealership to apply for a car loan, but keep in mind that there are significant advantages to doing some advance planning. Dealerships often mark up the interest rate of a loan for which you may qualify, so it makes sense to compare rates and terms from different lenders. Working directly with the lender also cuts out the “middle man,” which gives you the opportunity to respond directly to any questions or issues the lender may have that could prevent them from making you a competitive offer. However, keep in mind that you may not find this level of personalized service available through online providers and large commercial banks, which tend to have highly standardized policies in place in order to process a large volume of applications. But organizations like your credit union may well be able to offer lower rates, and possibly a bit more flexibility under a criteria that takes into account your personal history with them.
Confine your loan shopping to a two-week time period: When a financial institution receives direct authorization from you to check your credit report for the purpose of extending you a loan, this is considered to be a “hard inquiry.” In many cases, this will result in your credit score dropping by a few points (generally less than five). However, most credit scoring models are sophisticated enough to recognize when you are shopping for one loan. Multiple inquiries for an auto loan are treated as one in terms of impact to your credit score—if you complete these applications within a relatively short timeframe. Although the exact time period varies according to the scoring model used, it’s generally safest to complete your comparison shopping within a window of about 14 days to avoid taking more than one hit to your credit score.
Walk in with a pre-approved, no-obligation loan: By obtaining pre-approval on an auto loan before you even set foot onto a dealership lot, you will help reduce car-buying stress with an established budget, and place yourself in a stronger negotiating position from the outset. In “How an Auto Loan Preapproval Can Save You Thousands When You Buy a Car” The Penny Hoarder recommends applying to various lenders, and then asking the dealer to beat your best pre-approved loan offer. When this leverage firmly in place, it’s easier to operate with confidence.
Be sure to shop your loan separately from the car. In fact, negotiate each aspect of the deal separately: One of the most common tactics car dealerships use to get the upper hand in a negotiation is to get you to focus on the monthly payment. This strategy is great for the dealership’s bottom line, but not for your financial well-being. By thinking only in terms of the monthly payment, it’s easy to overlook the areas where you could be getting shortchanged. To walk away with the best deal, you’ll want to carefully consider everything at play, from the vehicle’s price and its various options, to financing and the value of your trade-in, if relevant.
How getting hung up on the monthly payment can hurt your finances: In many cases, car dealerships may offer you a lower monthly payment by stretching out your loan payments over a longer period of time. Effectively, you’ll be agreeing to pay more money in exchange for the ability to pay it back over an extended term. Longer-term auto loans are not without risks, since cars quickly depreciate in value. If you go this route, you’re more likely to find yourself in a situation in which you owe more on the car than it is actually worth. From anyone’s perspective, being “upside down” on a car loan is not a secure position to be in. As a general rule, you can get a lower interest rate on a car loan by financing it over a shorter period of time. Ideally, experts tend to recommend that you finance a new car for a term of 60 months, and stick to 36 months for used cars.
Need an efficient way to get a full assessment of a car’s affordability and make an informed buying decision? Check out Edmunds’ True Cost to Own calculator. This online tool makes it easy to compare costs for different vehicles based on depreciation, loan interest, taxes and fees, insurance premiums, fuel, maintenance and repairs.
And if you don’t want to haggle over prices but are looking for a terrific deal on a certified pre-owned vehicle, be sure to get out to The Police Credit Union’s Used Car Sale with Enterprise from November 22-24, 2019. Stop by one of four car sale locations during this time, and when you finance your new vehicle with The Police Credit Union, you’ll receive a 1.25 percent APR discount.* For details visit https://www.thepolicecu.org/carsale.
*APR = Annual Percentage Rate. Example rate of 1.64% APR with 36 monthly payments = $28.49 per $1,000 borrowed, assumes .25% discount for enrollment in automatic payments, a 1.00% off current Credit Union rate with a max loan term of 60 months, and .25% discount for The Police CU members who purchase a vehicle at Enterprise Car Sales location on November 22-24, 2019 (fully indexed rate of 3.14%). APR is based on evaluation of credit history, so your rate may differ. Rates, fees and terms are subject to change at any time, visit our website for current rates at www.thepolicecu.org.
Used vehicles were previously part of the Enterprise rental fleet &/or an affiliated company’s lease fleet or purchased by Enterprise from sources including auto auctions, customer trade-ins or from other sources, with a possible previous use including rental, lease, transportation network company or other use. All vehicle inventory is available by visiting enterprisecarsales.com or a dealership where a Sales Consultant can help you find vehicles available in our nationwide inventory. Delivery of vehicles outside local area may require transfer fee.
2$50 Gas card will be emailed or mailed to The Police Credit Union members who finance a vehicle with The Police Credit Union through Enterprise Car Sales on November 22-24, 2019.