To find the best loan for your auto purchase, do as much comparison shopping as you can before you sign on the dotted line.
Investigate the many sources that provide car loans: your credit union, your local bank, the car dealership where you’re buying, Internet lenders such as Lending Tree and E-Loan, major national financial institutions such as Citibank and JP Morgan Chase, and car-loan specialty companies such as Americredit. In addition, some automakers offer financing through their own lending divisions, such as Toyota Financial Services and General Motors’ GMAC.
Online loan-comparison sites such as BankRate offer calculators that can help you quickly find and compare a number of possible loans. Check the annual percentage rate, term of the loan, and other factors, such as whether you can pay off the loan early without penalty. Evaluate the entire transaction, including any rebates or other special dealer offers, to compare the total you will pay under each loan.
Don’t fall victim to high-pressure tactics at a car dealership and simply sign up for the first loan you’re offered by the dealer’s finance manager. Know that finance managers work on commission and may suggest the deal that’s got the fattest commission in it for them, not the one with the best terms for you. Come to the dealer with the best deal you can find through your own research, then compare it with the loan the dealer offers.
The best loan will vary from person to person, depending on many factors:
- Do you have good credit or bad?
- How much down payment are you providing?
- Are you buying your car from a dealership or a private party?
- Are you trading in a car as well as purchasing one?
- How expensive is the car you’re buying?
- How long do you plan to own the car?
- What loan terms do you want?
- What length of loan do you need to get an affordable payment?
The better your credit and the shorter the loan terms you need, the easier it will be to find a great car loan.
Be warned that in general, obtaining a car loan becomes more difficult in tough economic times. Many banks raise the bar on the qualifications they want to see in a car buyer. If you have a credit score below 700 or so, you may have a difficult time getting a car loan at an affordable rate from a traditional lender. (You can find out your credit score through Experian, Equifax, or TransUnion.)
On the upside, when car sales are down, some automakers offer zero-percent interest loans on particular car models, or loans where you pay no interest for the first year or two. If you qualify, be sure to investigate these loans before signing up. A zero-interest loan may or may not be the best deal; some zero-percent loans are tied to your paying a particular price for a car, and you might be able to get a lower price without the zero-interest offer. Carefully weigh the pros and cons and make sure you total up all your costs over the term of the loan to discover the best deal.
One final option to weigh is borrowing from an existing home equity line of credit. This is a risky move though because if you can’t make your loan payments, you could lose your house. But borrowing on your home credit line has two strong advantages: You won’t have to go through an approval process, and the interest you pay will be tax deductible, where a traditional car loan’s interest is not tax deductible.
Business reporter Carol Tice contributes to several national and regional business publications.