How to Shop for a Car Loan
Save money on your new car purchase.
If you are in the market for a new car and need financing to swing your purchase, you have a number of borrowing choices available to you. Certainly, your new car dealer can arrange financing for you, but there are cheaper places to shop for an auto loan. To get a preferred rate on your new car loan, there are some steps that you should take first, what we will cover here.
1. Learn your credit rating. Lenders are eager to let you borrow money, but they’re also concerned about your credit status. Your credit score is a 3-digit number that carries enormous weight — the higher your score, the more likely you’ll be approved for a loan and at a favorable interest rate. Obtain your score though CreditKarma.com for free.
2. Fix your credit. A credit score below 700 demonstrates that there may be problems with your credit reports. Visit AnnualCreditReport.com and obtain copies of all three credit reports for free. Those reports are from Experian, Equifax and TransUnion, the top three credit reporting bureaus. Review each report, make corrections, and about 30 to 60 days later your score should rise. If your score remains unchanged, then you know what you have to work with when seeking credit.
3. Choose a car. Find a car that interests you, but don’t make your purchase just yet. Get a ball park figure for the car’s final price, assuming that you’ll negotiate the best price and take into consideration incentives. For instance, that new sedan with a sticker price of $25,995 you’ve negotiated down to an even $23,000 including cash back. You plan to put $3,000 down, thus you will finance $20,000.
4. Run the numbers. Now that you know how much you need to finance, you can shop for a loan based on that amount. In this example, you’re financing $20,000, therefore you need to find a loan that you can afford. A 60-month loan financing $20,000 at 6 percent interest will cost you $386.66 per month. If your budget is $400 per month, then this loan will work. If your budget is less, say $350 per month, then you need to either put more money down, look for a lower rate or consider a longer term loan. Use a loan calculator to run your numbers.
5. Shop for a loan. The first four steps in the exercise was all about preparing you to apply for a loan. Now, you need to look for a loan. You have many choices besides the dealer’s financing arm. For instance, your bank or credit union may be willing to extend a loan to you — a good first place to start. You can also put your loan out to bid, using a service such as Money Aisle to help you find a loan. With Money Aisle lenders bid on offering your a loan — a great way to save yourself some money.
6. Apply for a loan. With lending information in hand, apply for a loan. Your lender should be able to give you a good idea on what type of loan you should receive before applying. Know the ball park figure for the interest rate, your monthly payment and loan cost before applying. Once you’re confident that you can swing a loan, then make application. You should know within minutes if your loan was approved or not.
Buy a Car
Now that you have your loan approval in hand, negotiate with your dealer. You’ll be treated as a “cash buyer” because you’re already approved for a new car loan. This can save you even more money, putting more cash in your pocket or using those savings toward your down payment.