Shopping around for an auto loan pays off

By ,
Ask a Lender
April 6, 2017 | Updated September 26, 2017


Key Points

Don't rush into car loans

  • The interest rate and length of an auto loan add significantly to the overall cost of a car.
  • Auto loans are available through lenders such as banks, credit unions and online lenders.
  • Shop around to understand the loan costs and how much you can afford to pay for a car.

When your new car is parked outside the dealer’s display window and your heart is pumping with excitement, a car loan may seem like just a detail standing in your way.  You even may think the dealer is doing you a favor by making the financing quick and easy, allowing you to roll out of the lot that day. Don’t be fooled.

People often spend a lot of time searching for the best deal on a car, but don’t bother much with the details of auto financing. Once they’ve picked out the car and haggled with the salesperson over the price, it’s just a matter of sitting down with the dealership and signing off on the auto loan quoted to them.  This is a mistake.

Check offers

Just like it is a good idea to comb the consumer reports for the right car model and visit several dealerships to get the right price, it pays to shop around for an auto loan. One reason is the potential cost savings.

It is important to realize that the auto loan is a separate product, just like the car company’s extended warranty offer and the car’s optional features --- the custom-fitted ski rack, the GPS system and heated leather seats, for example --- are separate products. The dealership is usually making money on the financing, and you should carefully consider what you’re being quoted.

The interest rate and the auto loan’s term length can add hundreds of dollars to the total cost of the car in interest payments. By some estimates, car buyers often are overcharged by 3 percent on their loans at the dealership. Consumer advocates also warn that dealerships often push loans with longer terms. Although a longer-term auto loan usually will mean lower monthly payments, it also will add a significant amount to the overall cost of the car from the longer-term interest charges.

Auto dealers and car companies also often advertise low- or no-APR charges as a general selling point and to entice people to look no further than the dealership for an auto loan. These deals are often only available to buyers with pristine credit ratings. Many people often find that they don’t qualify and are quoted a higher rate.

Be in the driver's seat

Lining up auto financing in advance gives the buyer more flexibility and bargaining chips in negotiating with the dealership. For example, dealers sometimes give buyers a choice between taking their low- or no-APR rate or taking a rebate. If you have already lined up your financing with a good rate through a separate lender, you potentially could be eligible for the dealer’s rebate.

Another reason why you should shop around is that there are several options. Traditional banks, credit unions and online companies offer auto loans. As a rule of thumb, it is a good idea to see what a few different lenders are offering. Even if you don’t finance through one of these sources, you’ll at least get a sense of how much an auto loan should cost you given your credit history. You’ll also get an idea of how much you can afford to pay each month. This can help you avoid buying too-much car for your budget.

The bottom line is that is never a good idea to walk blindly into a car dealership. Just like you should have a good idea of the average cost of the particular make and model of the car, you should also know the appropriate charge for the auto loan.

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