In the market for a car? In a perfect world, you’d walk into the dealership with a briefcase full of cash (OK, a check would do, too) and purchase your new set of wheels right then and there. In the real world, of course, most folks find saving that much money next to impossible — and head to the bank or dealership’s financing arm to get a loan.
The good news is, there are ways to lower your borrowing costs. Here are five:
1. Make sure your credit is in good standing
Before ever setting foot in a dealership, you’ll want to make sure that your credit is in good health. Your auto loan interest rate is going to be heavily dependent on your credit score. First, order a free credit report from annualcreditreport.com, a federally-mandated website that offers you three free credit reports annually.
Check your credit report for any errors or red flags. Tidy things up, pay down your credit-card balances as much as you can, and dispute anything that looks incorrect or suspicious. After sprucing up your credit, pay the small fee to get your credit score. Having your credit score on hand will allow you to get more accurate quotes and potentially negotiate your rate later on in the process. If your credit score is low (under 640), you may have some work to do before you consider getting a new vehicle. (Click here for more information on how your credit score is calculated — and how you can improve it.)
2. Shop around at local banks and credit unions
You may not have to look further than your local bank or credit union for the best auto loan rate. Credit unions, in particular, tend to have very low rates as they are non-profit financial cooperatives that re-distribute earnings through member benefits (such as lower interest rates on loans). You may be able to find the auto loan rates clearly listed on the bank or credit union’s website. If not, calling for a quote should not take more than a few minutes.
3. Compare rates at national lenders
Armed with your local rates, do some quick comparisons at the national level. Bankrate and Yahoo offer auto loan comparison calculators that will allow you to choose your loan length and type (new or used auto).
4. Negotiate with the lender who has the lowest rate
Even though you’ve compared a good number of lenders by this stage and found the one with the lowest rate, that offer may not be their best you can get. If your credit score is in the high 700s or even 800 or more, you may be able to negotiate an even lower rate. Even if you don’t, it doesn’t hurt to try. If you don’t have a checking or savings account with the lender, offer to create one if they lower the rate for you.
5. Negotiate with the Dealer
Now that you have the best quote in hand, you can start your vehicle shopping. Be on the lookout for special promotions. Occasionally, you will see automakers run 0% or other very low-interest financing offers. Just make sure that the low rate offer isn’t offset by loading up on additional fees up front.
Before talking financing with the dealer, you should always come to agreement on pricing terms of the purchase. Don’t give them the opportunity to dangle a low interest offer as a reason for not negotiating on price.
Often, dealers get commissions on auto loans, so they may be flexible in the rate that they can offer you. If that can’t measurably beat your lowest-rate quote, go with the lender instead.
Enjoy your new car!
GE Miller blogs about personal finances for young professionals at 20somethingfinance.com.