What Every Buyer Needs to Know When Financing a Vehicle
You may have several questions and concerns when financing a new or used car. Here are a few tips on what to expect and how financing a car works.
The term of the loan, or the length, affects the interest rate. A short term loan provides a lower rate, but higher monthly payments - a longer term means higher rates, but lower monthly payments. Also, financing used vehicles have higher rates then new cars.
Know Your Credit Score
The primary factor in determining your loan terms is your credit rating. Your credit history and credit score are designed to give lenders an idea about the risk they take on by lending you money, if your loan is seen as high-risk, your interest rate will increase. If you are visiting several dealerships in search of the right vehicle, do NOT let them run a credit report. Your credit score decreases every time a credit report is run. Wait until you find the car you want.
Types of Financing
Dealership Financing - Financing a car through a dealership can be fast and convenient. They have a variety of financing and leasing options available. Dealerships are more flexible with lending if you have a low credit score or lack credit history. Keep in mind that the dealership wants to make money and will accomplish this through their finance department. They do this by finding the lowest approved interest rate from a lender and then they increase it. This marked-up rate is the dealerships profit on the financing. If you do your research you can negotiate for a lower interest rate. They can also have high pressure sales tactics to push add-ons and their loans are usually front loaded (meaning you pay the interest during the beginning of the loan).
Online Financing - The advantage to finding loans online is many lenders advertise their interest rates. Once you find the rate you want, you can fill out an online credit application and find out if you have been approved fairly quickly. One caveat to online financing is dealing with the unknown. To avoid scams, be careful to choose a loan from a reputable institution. You can also use this as a negotiating tool at the dealership if you are pre-approved.
Bank / Credit Union Financing - A bank or credit union won't have a sales pitch for any add-ons. They will, however, tell you if you are paying too much for the vehicle. Getting a loan at a bank is not as convenient as at the dealership and sometimes they don't have the lowest interest rate. But, if you are willing to do the extra research, you can find a good rate and a simple interest loan.
What to Watch Out For
Do you really need the extended warranties and dealership add-ons that they offer you when purchasing your vehicle? Probably not, do adequate research on the type of vehicle you are financing to make sure you're not overpaying for packages you don't need - and that you aren't missing out on the ones you do. Below are some things to look out for when financing a vehicle:
Additional Dealer Markup
Additional Dealer Markup are charges for services such as rust proofing, VIN etching, undercoating, dealer prep work, and other fees. Many of these services such as rust protection and undercoating were already applied at the factory. Just because these fees are already on the contract doesn't mean you can't negotiate to have them lowered.
Subject to Financing
Look out for the "subject to financing" statement when signing a contract. Some dealerships will take you down payment and send you home without signing a final contract. Before you make your first payment, the dealership will call and tell you that the financing didn't go through. You have to go back to the dealership and either return the car or pay more on the down payment. When this happens, you will ALWAYS have a higher monthly payment.
What is the Total Financed Amount?
The dealership wants you to focus on the monthly payments not on the total cost. Make sure that your trade-in, down payment, rebates, ect. are being accurately applied to the financed amount. Read your contract carefully before you sign it. Dealerships sometimes make "mistakes" when they don't put the correct interest rate on the contract.