New Car Loan Financing – 5 Tips Before You Buy

new car loan financing

New Car Loan Financing

Looking to get some new wheels without breaking the bank? Make sure to factor the cost of new car loan financing into your budget.

Buyers who forget to account for new car loan financing may find themselves with monthly payments they can’t afford.new car loan financing

Even with the economy moving toward recovery, more Americans are struggling to pay off their car loans. A recent State of the Automotive Finance Market report showed a 70% increase in motor vehicle repossessions.

To avoid becoming one of these statistics, it’s important to do some research before hitting the car lot.

These five tips can help equip you with the information you need to get a great deal on your new car loan financing.

1. Make sure you know your credit score

The interest rate you get for new car loan financing will be largely determined by your credit score.

Your credit score is a record of your financial history that gives lenders information about how trustworthy of a borrower you are.

Credit scores range from 300 to 850, with 300 being the worst, and 850 being the best.

There are three credit reporting agencies: Equifax, Experian, and Transunion. You can get a free credit report from each of these agencies once a year. Sites like CreditKarma will also allow you to access your credit score for free.

When shopping for new car loan financing, it’s a good idea to get your credit report. This way, you can go into negotiations understanding your credit score.  In addition, you’ll know what kinds of interest rates are available to you.

If you have a credit score of 750 or higher, you likely won’t have any trouble qualifying for a competitive interest rate. By contrast, if your credit score is under 650, you may end up with a high-interest rate.

If your credit score isn’t great, you may want to consider taking some time to repair your credit before purchasing a new car.

If waiting isn’t an option, you should take time to research the best loans available to you.

2. Shop around for the best new car loan financing rate

A lot of car buyers don’t realize that they have options when it comes to their new car loan financing.

If you have a good credit score, you can most likely get a good interest rate on a loan from the dealership. If you have a lower credit score, however, it’s a good idea investigate other financing options.new car loan financing

You can even apply through your local bank or credit union before you go shopping for a car.

Banks and credit unions often offer good interest rates, even if your credit isn’t perfect. Not only that, having a financing offer can help you negotiate for an even better interest rate at the dealership.

3. Choose the shortest loan term you can afford

When it comes to financing, there are two main factors that determine how much you will end up paying. The interest rate, and the life (term) of your loan.

Depending on the price of the car you’re purchasing, you may have the option to choose a car loan of 3, 5, 7, or even 9 years.

While choosing a longer term for your loan will give you a lower monthly payment, it will also mean that the total cost of the car will be higher.

Also, keep in mind that, unlike purchasing a home, purchasing a car is not an investment.

While the value of your home should appreciate after you purchase it, the value of your car will always depreciate.

For this reason, if you take out a long-term car loan, you run the risk of ending up with an upside-down loan, where you owe more on your loan than the car is worth.

At the end of the day, those low monthly payments just won’t pay off.

4. Don’t focus on the monthly payment

In general, when considering the cost of a new car, it is a mistake to look at the cost of your monthly payments, rather than the total cost of the car.

Women focusing camera

When you go to the dealership, the dealer will likely ask you what kind of monthly payment you can afford.

Don’t fall into this trap. Dealers are trained to sell you on an attractive monthly payment. This way you won’t notice if you’re paying too much, or not getting the best deal on financing.

Rather than giving the dealer a monthly payment you’re comfortable with, give them your maximum budget for the total cost of the car. Otherwise, the dealer may try to sell you on a car more expensive than what you’re looking for by promising an affordable monthly payment.

5. Set some extra cash aside

Of course, even though the total cost of the vehicle is the most important factor, everyone would like to have as low of a monthly payment as possible.

One way to lower your monthly payment is putting down at least 20% of the purchase price in cash. Additionally, you should always pay for any taxes and fees in cash, rather than rolling these into the cost of your loan. These extra costs add to the cost of your loan, but don’t add any value to your car.

While some dealers will offer borrowers with strong credit a loan with no money down, and no taxes or fees at signing, it’s always better to put cash down. The more money that you finance, the more likely that you will end up owing more on the car than what it is worth.

new car loan financing

Searching for a new car, and getting the best new car loan financing, can be a stressful and overwhelming process. But it doesn’t have to be.

Knowing and understanding your credit score, shopping for the best term, and prioritizing total cost over a long monthly payment can all help you get the best deal on your car loan.

Being equipped with this knowledge before purchasing a new vehicle can help save you hundreds of dollars. Quite possibly even thousands of dollars in the long run.

What is your experience like with car shopping? What strategies have you used to save money on a car loan? Leave us a comment below!

 

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11 Comments

  1. If you need financing for a new car, your credit score is probably the most important factor that can help you negotiate the deal. If you don’t know your credit score – Credit Karma is the way to go. Although it may not be the exact score the lender will use, it will get you within a few points. The advertised rate is often only for the people that have exceptional credit scores.

    I like your other points too – go for the shortest term you can and don’t focus on the payments. What you are really aiming for is paying the lowest overall cost over the length of the loan. The more you put down, the lower your financing rate, and the shorter your loan means that you will fork over less money out of pocket.

    Great article! Thanks for sharing and helping navigate the auto financing process.

    • Hi Jen – Happy to hear you found the article helpful. Knowing your credit score before you enter the dealership is definitely a negotiating plus. It’s also important to have your financing locked up before you start talking price.

      You are absolutely correct in your observation that the advertised rate is only for those that have the best credit rating. So, it pays to make sure that you have the best credit score possible when you start looking for new car financing.

      In addition, it’s also an advantage to have as large a down payment as possible or a good trade-in value, so you are financing as little as possible.

      Patrick

      Credit Squared

  2. Hi Patrick

    Thank you kindly for these very helpful tips.
    Most people get excited and emotional when purchasing a new car so they tend to miss the fine details and the car dealers take advantage 🙂

    One should always put down the largest deposit possible to avoid paying higher interest rates and the higher your monthly payments the less interest you will pay in the end.

    It is always a good idea to take one or two people with you who know a lot about cars and finance.

    Regards,
    Kamil

    • Hi Kamil – Thanks for your insightful comments. It usually pays to be prepared when you show up at the auto dealership to buy a new car.

      If you haven’t considered financing options, down payment, invoice price and credit score you more than likely will end up paying more.

      A car purchase should never be an emotional decision, so do your research and know all the facts before you start your search.

      Here a Credit Squared we have lots of information about personal finance. So if you want an edge when searching for financing have a look around our site and improve your credit intelligence.

      Patrick

      Credit Squared

  3. Number 4…such an important point. I think so many of us fall into this “low monthly payment” trap. But if we were to ever take the time to sit down and calculate the total amount we end up paying for this car…a thing that depreciates…we would probably tear our hair out.

    This is a very sobering article. Lots of important points to think about before rushing off to purchase a car. Great article Patrick!

    • Yes understanding the monthly payment trap is probably the most important tip of this post. When you enter a car dealership you should certainly know how much you can afford to spend.

      It also helps to know the invoice price of the car and you should also have your financing already locked up (pre-approved), so you can negotiate that as well.

      If you end up negotiating the dealers offered financing because it’s better, you’ll need a good credit score, so make sure you know your number.

      Ultimately, price should be the main focus when looking for a new car. Once you have established price then talk financing. When shopping for new car loan financing it pays to be prepared before you shop.

      Patrick

      Credit Squared

  4. Very valuable and insightful advice everyone should follow when financing a car. Especially about knowing your credit score. This is so important these days and there are many ways to get this for free. Most credit cards offer you a free credit score. I like that you mentioned to shop around for financing. In my experience credit unions have always given the best rate.

    • Joey – Thanks for commenting. Shopping around for financing before the car search process starts is critical.

      Your experience is spot on as credit unions very often offer the best rate. Sometimes a dealers rate is better, so it’s best to go in prepared, as you may end up with an even better rate.

      I purchased car a few years ago and I had financing through my employer (a community bank) and the dealer beat my employer! You never know.

      So always be prepared before you start you car search. Know you credit score, nail down your financing, have a good down payment in mind and know the invoice price of the car you have targeted.

      Armed with this info, you should be on your way to a great deal.

      Patrick

      Credit Squared

  5. Great article and very useful tips there Patrick.

    ‘ve seen far too many of my young friends stretching themselves and getting caught because they don’t plan for repayments which is so crazy.

    Your point about paying it back as quick as possible (if you take credit) is the smartest IMO.

    Cheer again.

    • Thanks Toni – Your observation about your friends is correct. Too many people get caught up in the payment game at the dealership then find they have a difficult time making the payments.

      Definitely plan to pay down the debt as fast as possible, so that means placing a substantial down payment. That’s a tough order for most folks, so maybe a less expensive car or maybe a pre-owned model to start out.

      Have your new car financing lined up, know your credit score and have an idea about what you can afford before starting a new care search.

      Patrick

      Credit Squared

  6. Thanks for the great tips for financing a car. My wife and I need to buy a new one desperately, because our only car is breaking down. I’ll remember that it’s best to choose a loan that is paid off quickly, since a car isn’t an investment!

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