Mistake #3 – Not Getting Pre-approved On Your Car Loan

February 28, 2011

Most car buyers simply walk into a dealership, choose a car, and let the dealer provide the financing. This allows the dealer to bump the interest rate they charge above the rate the buyer actually qualifies for, called the “buy rate.” The difference between the buy rate and the interest rate the dealer charges is profit to the dealership. As a consumer, isn’t it better to keep that money in your pocket?

This is the third article in the series, “Top 5 Mistakes New Car Buyers Make,” and we’re looking at why it’s important to be pre-approved on a car loan BEFORE you walk into the dealership.

A $20,000 New Car

Let’s take the example of a new car that sells for $20,000. By the time you add tax and fees, and then subtract your down payment, you need to borrow $15,000. Your credit rating is good and you qualify for an interest rate of 4.99 percent. However, the dealership adds two points onto your buy rate. No big deal, right? Actually, it is a big deal. Let’s take a look at the figures.

Your monthly payment on a $15,000 loan over 60 months at the dealer’s inflated interest rate of 6.99 percent is $297. However, if you had been pre-approved at your own bank, credit union, or online lender you would already know that you qualify for an interest rate of 4.99 percent. A $15,000 loan over 60 months at 4.99 percent would lower your monthly payment to $283. That’s a difference of $14 a month.

At this point you may be thinking that $14 a month won’t matter much. But when you multiply $14 by the 60 month term of the loan you discover that you’ll be paying an extra $840 by the time your car is paid off. $840 is the amount you would have saved if you had been pre-approved and known the interest rate you actually qualified for.

How it Works

A car dealer can discount the selling price of a vehicle well below MSRP, yet not lose a dollar profit IF they bump the buy rate on your car loan a few points. It's one way that dealers make up lost profit when consumers use the Internet to make better deals on the selling price.

Don’t fall into that trap. Make sure you know the interest rate you qualify for. The easiest way to do that is to get pre-approved on your car loan before you walk into the dealership. If the dealer can match or beat your pre-approved rate then it’s okay to go with the dealer’s financing. However, if they can’t, use your pre-approved financing and keep more of your hard-earned money in your pocket.

Tomorrow, Mistake #4 - Pre-negotiate Only the Selling Price.

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