Car Buying Guide: More Car Loan Do’s And Don’ts

June 23, 2010

Readers can send in questions about the car buying process and get answers from an industry insider!

Paying a higher interest rate than necessary on your car loan can cost you hundreds, if not thousands of dollars more than necessary over the term of a loan. That’s why doing nothing about your car loan prior to walking in the front door of your local car dealership is one of the biggest mistakes you can make.

Car dealers make it easy to simply walk in and say: “Help! I need a new car now.” Savvy shoppers resist this temptation. Instead, they do their homework first:

  • Comparison shop--Get price quotes from more than one dealer on the selling price of the model you want.
  • Do the same with lenders--Make sure that you know the interest rate you actually qualify for. When in doubt, check with more than one financial institution.

Shop Around for a Car Loan
Do you already have a relationship with a bank, credit union or online lender? If so, apply for a car loan in advance of walking into a dealership. This allows you to know what interest rate you qualify for and what payments you can afford. This information also affects the price of the car you will be able to buy. The following is an example.

You have an excellent credit rating and qualify for a 5.99% interest rate on your car loan. Your budget allows for a monthly payment up to $390. You also have some money in the bank and plan to use $2,000 as a down payment. How much car can you buy?

A 5-year (60 months) car loan with an interest rate of 5.99% and a monthly payment of $386.56 allows you to borrow $20,000. Add on the $2,000 down payment and this means you can afford a car--including tax and license fees--that is worth $22,000. Not bad.

However, what if you make an impulse buy and walk into the dealership unprepared? They quote you 8.99% on your car loan. Your monthly payment on the same car increases from $386.56 to $415.07. The higher interest rate not only adds $28.51 more to the monthly payment, which means you can no longer afford this car, but it adds an incredible $1,710.60 (28.51 x 60 = 1,710.60) to the cost of the deal. You now have the option of taking more of your money out of the bank to increase the down payment in order to lower the monthly payment, or choose a less expensive car. Either way, you lose.

Common Sense
Doesn’t it make more sense to invest some time and effort before you walk into the dealership to nail down the interest rate you qualify for? If you do, it changes everything. You can now ask the dealer to try and beat the rate you pre-qualified for at your own bank, credit union, or online lender. If the dealer can lower the interest rate you already have, congratulations, because this means you just saved even more money. The dealer is no longer in control You are!

Tomorrow: When should you bypass your own bank to get a loan from a car dealer? (Hint: You can save a lot of money with zero percent financing! I’ll tell you exactly how much tomorrow.)

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