Buying a car is a major decision and an exciting one at that. Getting a new set of wheels can be one of the most enjoyable purchases you make if you do it right. However, cars are getting more and more expensive every year, making them harder to pay for with cash. Unless you have managed to save enough to purchase the vehicle you want outright, you will need to use debt to buy it. This means you will need to secure financing through a car loan application.
As with any form of debt, interest rate and credit are involved, and there are competing companies offering different rates and terms. You will need to negotiate a good deal, as that loan will stick with you for the next several years! It’s essential to get it right so that you can rest assured knowing you didn’t get ripped off, and that you got the best interest rate and terms you possibly could. Here are five tips that can help you save money on your car loan by negotiating good terms and making wise choices during the vehicle purchase and loan application processes.
1. Start By Negotiating Down the Price
This may sound obvious, but you’d be surprised how often people skip this step! It is so easy to get caught up in the emotional excitement and nervousness of making such a significant purchase and forget to negotiate a better price on the vehicle itself. Don’t be led astray by the misleading questions that the salesperson will ask, either!
They will probably try to get you to tell them what you want your monthly payment to be. Don’t fall for it! This is a trap to get you to agree to a longer-term loan in which the dealer or lender can make as much money as possible in interest and financing fees. They know that the longer you take to repay that loan, the more money they will make off of you. If you agree to a lower monthly payment, that means you’ll end up paying far more for the car over the term of the loan. It’s simple math. Lenders make money with interest. Interest accrues over time. Lower monthly payments mean more time to repay the loan, which means more profit for the lender and more cost for you.
2. Get the Shortest Loan Term You Can Afford
This follows naturally from the previous tip. If you go to apply for a typical car loan, the first loan term they will offer you will often be 60 months, which is five years. They may also offer 72 and even 84-month terms as well, with the enticing lower monthly payments that come with them. Don’t take the bait. Like we said in the above tip, this is not the excellent deal it appears to be. The best deal is the one with a higher monthly payment and a shorter loan term. Accepting a shorter loan term will mean you pay less money in interest over the duration of the loan, which means you end up paying less for your car overall. Don’t underestimate the difference either; it can be quite substantial!
Worse yet, if you agree to a longer-term loan, you run the risk of ending up upside-down on your car loan. This means the value of your car could be less than you owe before you are even done paying it off. How long of a loan term should you accept? The best deals will typically be had with the 36- or 48-month terms, which still allow you to have reasonable monthly payments, but will cost less in interest due to their shorter repayment timeframes.
3. Say No to Upgrades
While you are at the dealership, the car salesperson will want to make as much money off of the sale as possible. This means they will almost certainly try to up-sell you on a bunch of “upgrades” you don’t need. Keep in mind these items will be designed to make as much money for them as possible, so they will be things that cost more than they are worth. They might try to sell you different wheels or tires, rustproofing, extended warranties, floor mats, car alarms, and paint protection. These are all things you can say reject to save money.
4. Avoid High-Interest Rate Loans
If you have good credit, you are entitled to a reasonable interest rate. This isn’t rocket science. So if the salesperson tries to tell you that the best interest rate they can give you is higher than someone with your credit score deserves, walk away. If you have good credit, you should be able to get a loan with a single-digit APR. If you have average credit, you should be able to get a loan with something between 10-12 percent APR. If you have poor credit, you could pay 15 percent or more. If you have bad credit however, they might try to give you a loan with as high as 24 percent APR! This is just a rip-off. Do your homework to find out what your actual credit score is and what sort of APR you can expect from an auto loan before applying. That way, you’ll know whether the rate they offer you is appropriate or if you are being fleeced.
5. Don’t Let Your Emotions Get the Best of You
As we’ve mentioned in previous tips, buying a car can be one of the most exhilarating purchases you make in a year or even in several years. Because of this, it can be very easy to get caught up in the moment and allow your emotions to get the best of you. You might take a test drive in your dream car, smell that fresh car smell and see the glistening sparkle of the paint. Then you will have a tough time walking away without buying that car if the salesperson offers you a bad deal. They know exactly what they are doing and will try to take advantage of any excitement you have. So be sure to keep a calm, cool, and collected head on your shoulders and let your logic do the talking! If you keep your focus and make wise choices during this process, you can rest assured knowing you got a good deal on both the car and the loan.
Do you have any tips of your own which could prove helpful to others who are planning to finance a new car soon? If so, feel free to share them in the comments below!