Finding the right auto financing is one of the most important parts of the car buying process. But how do you figure out which option is right for you? We’ve come up with some general guidelines to help you find the best financing for your budget, credit, and personal needs.
1. Direct Lending Options
Some of the best sources for direct lending include banks, credit unions, and private online dealers. You may want to start your search with any bank or credit union that you already have a relationship with. If you have good history with them, they will likely have special offers on auto financing. If you receive offers from private online lenders or dealerships that you aren’t familiar with, make sure to look them up on the Better Business Bureau to ensure they are reputable.
When you get a loan directly from a bank or credit union, you may have more flexibility with the dealership. They might work harder to beat the deal you have and offer even better rates. By having an auto financing deal set up before you visit the dealership, you can focus on getting the best price for your new car and the highest price for your trade-in, rather than having to worry about haggling for better financing offers.
2. Benefits of Going With the Dealership
According to the Center for Responsible Lending, eight out of 10 car buyers choose to finance with the dealership. That’s partially because choosing the dealership’s financing can provide more than just a better APR. For instance, it will be easier for you to negotiate a lower price if you are also working with the dealership on financing. Your business will be even more important to them, so they may be willing to work with you on the total cost of the vehicle, or even throw in some free upgrades.
It is often easier to get approved for a loan through a car dealer. However, they don’t always have the best rates available, so you may save more with direct lending through a bank or credit union. Before you head into the dealership, it’s helpful to have another financing offer in hand. Even if you choose to go with the dealership’s financing, you’ll have a rate for them to beat.
The dealer may be able to offer special manufacturer incentives, such as lower APR, no down payment offers, or cash back. You may also be able to negotiate the APR, loan term, or monthly payment. Even if you do decide to finance with your dealership, going in empty-handed will make you an easy target.
3. Know What You Can Afford
When comparing auto financing offers, there are certain things you will want to take note of, including:
- Annual percentage rate (APR): A lower rate will save you more money.
- Loan term: A shorter term means higher monthly payments, but less interest paid overall, and possibly a lower APR. Most dealerships offer loan terms between 36–60 months.
- Down payment: The higher your down payment, the shorter your loan term will be, and you may possibly enjoy a lower APR.
- Monthly payment: This will be affected by the APR, loan term, and down payment.
Keep in mind that determinants like the length of the loan term and how much of a down payment you can afford will change your monthly payment and the APR. For instance, if you can put down a larger down payment or pay off the loan faster, the interest rate will likely go down.
4. Know Your Credit Standing
Your credit is a huge determining factor of how good a financing offer you will receive. If you aren’t sure of what your credit is looking like, visit AnnualCreditReport.com for your free credit report. If you notice any errors, make sure to have them corrected before you apply for auto financing.
If you have bad credit or no credit at all, there are still loan options available to you. However, you may not be eligible for favorable rates or loan terms. If you need a car now, consider getting the best loan available to you at the moment and then refinance it in the future when your credit has improved. You might also consider applying with a co-signer.
5. Shop Around
Don’t settle for the first offer you find. In fact, you should have at least three offers in hand before visiting a dealer. Make sure you have done your homework and compared various offers before stepping foot into the dealership. This will give you more bargaining power and a greater understanding of what to expect.
6. Lease It
When all else fails, you can lease. This is similar to a long-term rental agreement. This is a great option if you aren’t concerned about owning a car, or if you like to frequently upgrade your vehicle.
You will receive various leasing offers from the dealership based on your credit and ideal loan term. Be sure to consider the number of months and miles that you need the vehicle for. At the end of the lease agreement, you may be able to buy the vehicle at an agreed-upon discounted price, or you can simply return it and pay any remaining fees.