If you’re in the market for a new car, you’ll probably put in some serious research time to hunt down the best price. But if you’re planning to finance the car purchase, you’ve only done half your homework.
The average new-car loan runs over five years, according a 2004 survey by Power Information Network. Younger buyers tend to opt for longer loan terms – up to seven years – so locking in the lowest-possible interest rate will make a big difference in how much you’ll pay for those new wheels in the long run.
About half of vehicle buyers go straight to the dealer to arrange their financing. Kerry Rivera with Toyota Financial Services (TFS) points out that a big selling point here is one-stop shopping convenience.
"By going to the dealership for financing, the customer can take care of everything in one place…you pick out the car, visit the finance office, who in turn will shop your credit around and find you a lender," says Rivera.
Customers can also take advantage of the additional products offered at dealerships, such as extended warranties.
Some dealerships have also begun to offer online credit applications, which allow consumers to get a credit pre-approval certificate before going to the dealer. Scion Solutions, TFS’ financing for Scion customers, even posts your pre-approval rate online.
"With Scion, there is no need to negotiate," says Rivera. "If you know your credit score, you can immediately know your rate, too. The dealer does not add on any participation points for putting together the deal. The process for Scion is something no one else is doing in the industry."
Banks and credit unions, another popular option for financing, have been offering pre-approved car loans for years. Consumers who obtain a loan from their bank before they get to the dealership will know exactly how much they are qualified to borrow and at what rate – this way, no high-pressure sales tactics can push them towards a car that they can’t afford.
Tim Campbell, a teacher in Fort Collins, Colo., is most comfortable applying for loans at his credit union, where he has financed three cars.
"I choose the credit union over the dealerships because I like the comfort of having all of my banking in one place," he says. "My paycheck gets directly deposited and I can make all my payments online."
Campbell feels the credit union offers competitive rates for used cars, but admits he would check out dealership offers (sometimes as low as 0%) if he were buying a new car.
Online financial corporations such as Capital One or E-Loan are the newest option for auto loans. Savvy Internet users can apply for loans online without ever having to leave home and talk to a lender. By searching online for a loan, shoppers can also do some serious comparison shopping on sites such as Bankrate.com, which compares national and local auto loan rates.
Also, you can acquire a good bargaining chip by learning exactly what rate you ought to qualify for. First, get your credit score (eloan.com offers it free to first-time users), then go to the calculators at MyFico.com to find out what rate you should be offered for a car loan. Armed with this information, you’ll be able to negotiate more effectively for financing.
Finally, you might consider the old standby: asking the parents for a loan. You could pay very little interest, plus mom and dad can make a few dollars while helping you out. Sounds like a win-win situation, right? However, Susan Newman, Ph.D., social psychologist and author of "Nobody’s Baby Now: Reinventing Your Adult Relationship with Your Mother and Father," advises caution.
"You’ll want to weigh what strings could be attached," she says. You’ll know that from past history with them. Every time they’ve given you a large gift, did it mean you had to show up religiously on Sunday night for dinner? Did they remind you every time they saw you what a huge favor they had done for you?"
But Dr. Newman believes asking for a loan can be a positive experience when treated as a serious business arrangement. "A car loan from a parent gives you the opportunity to show them you are responsible…You’ll go up notches in their pride meter and you’ll find them treating you more like the independent adult you are…or hope to be," she says.
Before you sign your name on that next car loan’s dotted line, make sure you’ve done your homework and checked out all your financing options. The more you know, the better interest rate you’re likely to get.
- For the basics, read "Understanding Vehicle Financing, " a brochure from The American Financial Services Association Education Foundation.
- Toyota Financial Services’ websites offer online credit applications at Toyotafinancial.com.
- Learn your credit score at Eloan.com and your credit qualifications at Myfico.com. Then go to Bankrate.comfor average car loan rates across the country and the best rates in your area.
- For more detailed pointers on the entire process of buying a car, check out "The Insider’s Guide to Buying a New or Used Car" by Burke and Stephanie Leon, or "Strategies for Smart Car Buyers" presented by car authority Edmunds.com.
© 2008, Young Money Media, LLC. All rights reserved.