Smart Car Shopping: Knowing Your Credit Score Is Not Enough

April 13, 2011

Savvy car shoppers--and experts on savvy car shopping--recommend that consumers know their credit score before they walk into a car dealership. Why? To stop dealers from padding the interest rate on car loans.

When that happens, it increases the dealership’s profit, but that profit comes directly out of the car buyer’s pocket.

However, just knowing your credit score doesn’t always stop this from happening. Real protection comes from knowing the interest rate you qualify for. For most people, this means being pre-approved for a car loan before you set foot in a dealer’s showroom.

When you already know the interest rate you should get, be sure to ask the dealer for a quote of what they can do when you’re there in person. However, if they quote a rate that’s higher than your pre-approved rate from your bank, credit union, or online lender, choose the financing that’s already set up. If the dealer can beat the pre-approved rate, you just saved even more money.

Why It Matters

Let’s say I have a decent credit score of 695. I qualify for an interest rate of 4.99 percent on my car loan. However, because I didn’t seek pre-approval at another financial institution—and even though I know my credit score—I didn’t catch the fact that the dealership bumped that rate when they calculated my car loan at 6.99 percent. The extra 2 points increase my monthly payment from $419.78 to $440.47. Over the 60 month term of the loan this will add an additional $1,241.40 to my cost. This is money that I could have kept in my pocket. 

Savvy car buyers know they should deal with more than just their car loan in advance. Contact the dealership via email before you go there in person and pre-negotiate everything, from the selling price and the trade value, to the interest rate you’ll pay on your loan. This way, there’s nothing left to chance. You’ll be able to walk in, test drive the car, complete the paperwork, and drive home in your new car.

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