Introduction
Buying a car is a significant financial undertaking that has numerous things to account for. One of the most significant steps in this process is obtaining an auto loan with good terms. If you’re not diligent, you’ll end up paying a lot more than the true cost of the vehicle in the form of high interest rates, penalties, and long loan durations. The good news is that with some research, advance planning, and strategy, you can negotiate a car loan that meets your budget and prevents you from paying more than necessary over the life of the loan. The next seven tips will give you the power to negotiate the best terms on your auto loan so that you can drive the car you desire without overpaying.
1. Know Your Credit Score and Understand Its Impact
Before you even contemplate negotiating an auto loan, let alone even contemplating negotiating one, you need to realize what function your credit score will serve within this scenario. Your credit score is literally an indicator of whether you’re good about being in debt and what risk lenders see it as in lending to you. A better credit score means you’ve handled debt well and are likely to pay back the loan, whereas a lower score implies you might be a greater risk for default.
Having knowledge of your credit score prior to applying for an auto loan can greatly affect your bargaining power. You can get a free credit report from different services online. By looking at your credit score beforehand, you will also get a sense of what interest rates and terms on loans to expect to be offered. If your score is less than you would like, take some time to make it better. This may mean paying down existing debts, lowering your credit card balances, or even contesting any errors on your credit report. Borrowers with good credit scores usually qualify for lower interest rates from lenders, meaning obtaining a good score will end up saving you thousands of dollars on the loan’s duration. In addition to saving you money, knowing your credit score will spare you shocks and enable you to negotiate improved conditions when negotiating terms with lenders or dealerships.
2. Research Current Auto Loan Rates
One of the most critical steps in auto loan negotiation is doing extensive research on prevailing market rates. Interest rates vary based on a multitude of factors, such as your credit score, the length of the loan, the lender’s policies, and the vehicle you’re buying. Before you initiate negotiations, sit down and do some research to find out what prevailing auto loan rates are being offered for an individual with your credit score.
Compare website and online banking sites simplify accessing this data.
By comparing rates at several different sources, you can get some sense of available competitive rates offered to borrowers of similar credit risk. You would also want to compare rates among a range of financial institutions, including banks, credit unions, and even some online lenders, to avoid concentrating your search just on dealership financing options. Whereas the dealerships might provide financing options, the interest rates there can be slightly higher than from banks or credit unions. If you know what average interest rates are, you will be able to negotiate with lenders confidently, having an idea if the terms presented by them are reasonable or high. If a dealership’s offer is not competitive, you can use other lenders’ offers as bargaining chips and gain an upper hand in negotiations to obtain improved terms.
- Get Pre-approved for an Auto Loan
One of the best methods for approaching negotiations confidently is by seeking pre-approval for an auto loan.
A pre-approval letter from a lender informs you precisely how much you can borrow and at what rate of interest, based on your credit status.
This helps you budget your car purchase and avoids you overspending. Pre-approval also makes car dealerships aware that you have done your research and you are a committed buyer. Becoming pre-approved for a car loan places you at a leverage advantage in the negotiations because you demonstrate to the dealer that you are not simply dependent on the dealer’s finance alternatives. With a pre-approval letter in your pocket, you can shop for cars confidently knowing that your financing terms are already established, and you won’t be influenced by overpriced loan deals from the dealer.
If the dealer approaches you with financing, compare it with your pre-approval terms to determine if they can offer you better rates or better terms. Another benefit of pre-approval is that it saves you time. Instead of waiting around for hours at a dealership for them to approve your loan application, you already know how much you qualify for, which should make it easier to buy the car. Another benefit is that pre-approval should also let you pay less attention to the car itself, since you already know how much you can spend. #### 4. Don’t Just Negotiate the Price of the Car, Negotiate the Loan Terms, too
When purchasing a new or used car, most consumers concentrate mainly on the car’s sticker price and forget that the loan terms are also essential.
Although the car’s price matters, the interest rate, loan duration, and charges on the loan will impact the overall cost of the car in the long run.
If you are only concerned about haggling over the cost of the car, you could still end up paying much more than you thought because of less-than-favorable loan terms. Rather than just arguing over the cost, change gears and examine every aspect of the loan contract. Negotiate over the interest rate, the life of the loan, and additional charges that can be tacked on to the loan. A dealer may convince you to go for low payments each month by giving you more years to repay the loan, which may save you money month-to-month but cost you more in total from paying more in interest over the duration of the loan. By spending time learning and bargaining all the terms of the loan, such as the interest rate, loan period, and fees, you can be sure you’re getting the best possible deal. Don’t be afraid to ask the lender to reduce the interest rate or waive any unneeded fees. Keep in mind that you always have the ability to shop around and compare quotes from various sources to get the best possible financing.
5. Carefully Consider Loan Term Length
The term length of the loan is an important factor in determining the affordability of the auto loan.
Longer loan terms are appealing to most buyers since they generally mean smaller monthly payments.
This, however, may translate to paying more interest over time and can increase your debt repayment period. A longer loan term might seem like an attractive option, especially if you’re on a tight budget, but it’s essential to consider the full financial picture. Shorter loan terms, typically ranging from 36 to 60 months, usually come with higher monthly payments but offer the advantage of paying off the loan faster, which means you’ll pay less in interest over the life of the loan. While the higher monthly payment may be more challenging to manage, the savings in interest could make it worth the effort in the long run. If you choose the longer loan term, know that you’ll be paying more in additional interest. Compare loan terms using online loan calculators, which will help you visualize how varying terms impact your total payment. Request your lender provide you with a detailed breakdown of how varying term length impacts your payments per month and interest charges.
6. Be Aware of Excess Fees and Add-ons
When negotiating the auto loan, always pay careful attention to any add-on fees or add-on products that are included in the transaction. Although the interest rate is usually the most discussed piece, there could be other charges and products added to the loan that can raise the cost. These could include loan origination fees, document fees, vehicle protection plans, extended warranties, or GAP insurance.
Dealers can attempt to put these add-ons in, hoping to pad their profit margins, even if you don’t require them.
Although some of these items may be helpful, they cause the total price tag of the car and the loan to soar.
Extended warranties or service plans can seem enticing, but if they are not a requirement for your case, avoid them. Also, most of these add-ons can be bought individually later on if you realize you want them. Make sure to request a complete breakdown of all charges and fees on the loan before you sign. If you don’t feel right about any of the extra products or services, don’t hesitate to negotiate them out of the transaction. The idea is to keep your financing as simple as possible and not pay for anything you don’t need. #### 7. Use Your Down Payment to Minimize Loan Costs
Putting down a lot of money up front is the most effective strategy to minimize the overall amount you’ll have to finance on a vehicle.
The larger the down payment, the lower the amount that will have to be financed and, in many cases, this can mean less in monthly payments and less in interest costs over time.
A minimum down payment of 20% of the purchase price of the vehicle is usually advisable, although this can be adjusted based on the price of the car and your personal finances. Placing a higher amount of money down can also enhance your bargaining power. Lenders perceive a higher down payment as a sign of your financial responsibility, and they may provide you with more favorable loan terms as a consequence. A higher down payment lowers the risk for the lender, which might lead to a lower interest rate. Aside from reducing your loan, a high down payment also makes you a more desirable borrower. By minimizing the loan-to-value ratio (LTV), you inform lenders that you possess higher equity in the vehicle and will be less prone to defaulting. With a lower LTV, you are able to gain better loan terms, thus saving you money over time.
Final Thoughts
Negotiating the most favorable auto loan terms need not be a source of stress or anxiety.
By spending the time to learn about your credit score, shopping around for current market rates, getting pre-approved for a loan, and negotiating the complete terms of the loan, you can make sure that you’re getting the best possible deal.
Think about the loan term duration very carefully, be aware of any hidden fees and extras, and use a bigger down payment to negotiate better terms. If you plan meticulously, research extensively, and negotiate cleverly, you can ride off in the vehicle you desire with your financials in their original condition.
