Buying a car is tricky. After negotiating a fair selling price you then ned to be ready to go to battle for round two; negotiating a fair interest rate on a car loan. Many car buyers think, “Let me negotiate the selling price of the vehicle, and then I am all set!” This couldn’t be further from the truth.
A lot of shopper don’t realize that they can negotiate the interest rate on a car loan. Many buyers also don’t realize that they don’t have to take the financing offer that the dealership gives them. Consumer Reports recently published an in depth investigative piece on auto loans and how they take advantage of consumers.
Today we’re going to walk you through how you can get a low interest rate on a car loan. No gimmicks, no ads, no BS, just the information you need to be informed the next time you finance a car purchase.
Let’s dive in.
What car loan options do you have?
When you buy a car you have many options for how you pay for it. Some people (if they have the means for it) like to pay in cash. Others (on new vehicles) like to lease. Most of us will end up financing the purchase of a vehicle.
This means we take out a loan. The bank pays the seller, and we then pay the bank for a set period of time. The bank makes money by charging you (the customer) an interest rate. On each of your monthly payments for the loan you are paying down the principal (the total loan amount) and interest (the money the bank makes).
That’s a super simplified view of financing a car. Let’s focus our attention on what options you have to secure your loan.
Car dealership loans
One option is to take the financing offer a dealership provides you with. If you’ve bought a car before you know at a certain point the salesperson is going to ask you to fill out a credit application. By filling out their credit application you’re giving the dealership the opportunity to contact multiple financial institutions to see what loans they can get you approved for.
In the industry this practice of sending your information out to many banks is sometimes referred to as “shotgunning”.
The dealership’s finance manager will see what you got approved for and then likely “mark up” the interest rate. Remember, the interest rate is the profit the bank makes for having made the loan. Well, the dealership can make money too by increasing the interest rate above what the bank approved you for. This is sometimes referred to as “holding points”. If you get a financing offer from a car dealership, and it is not a special (or subvented) rate from the manufacturer (i.e. zero percent financing), then it likely is a marked up interest rate.
Bank and credit union car loans
Coming into a car dealership with a pre-approval from a bank or credit union for your car loan is a smart decision. In advance of purchasing your vehicle you can contact your local bank or credit union to see what financing offers they can provide you with.
Credit unions are notorious for having very competitive used card loan interest rates. You can, and should get a quote from an outside financial institution before going to the dealership.
The dealer says I have to take their financing
More and more frequently, especially as the chip shortage has drastically reduced new car inventories, we have heard from YAA Community members that dealerships are saying “You have to finance through us if you want to buy this car.” While this isn’t illegal, it certainly is unethical. That being said, as consumers we have a way to combat it.
To get the lowest interest rate possible on your car loan, it may make sense to take the dealership’s finance offer and then immediately pay off, or refinance the car loan. If you are going to do this, do not tell the dealership. The dealership will receive a chargeback on the loan they placed (aka it will cost them money), however you are well within your right to refinance your loan as quickly as you’d like.
How to refinance a car loan
The steps to refinance a car loan are quite simple. There are more and more companies that have entered the refinance space. Here at YAA we don’t directly advocate for one or another. It’s important that you understand how refinancing companies make money so that you can be informed as you go through the process.
Refinance companies do not make money by placing you in a loan. Instead, refinance companies make money by selling their customers ancillary products (think extended warranties, insurance policies, etc.)
If you’re going to refinance your car loan (which you likely should if you took the dealer’s financing), then be aware that the refinance company will try to sell you their insurance products. As always, be sure to negotiate the price of those products if they interest you, and get a quote from YAA for the extended warranty so that you have leverage.
What if I have bad credit?
That’s a great question! We have an entire resource dedicated to helping those that have subprime (or no) credit. Take a look at that here: https://joinyaa.com/guides/how-to-buy-a-car-with-no-credit/
If you have questions, please post them on the forum. We’re here to help!