Finance Your Car Loan at a Lower Cost - 4 Smart Ways to Get Ahead

One common mistake people make when buying a new car is forgetting to include the cost of auto financing in the total price.

Let’s say you convince your dealer to shave $1,000 off the sticker price. However, the dealer talks you into zero down payment and stretching your car loan into longer terms to keep monthly payments low.

This might sound great on paper, but in reality, you’ll end up accruing more in terms of interest. If you’re willing to negotiate the price of the car, you shouldn’t ignore the rates and terms of your car financing. Doing so could burn a hole in your pocket. 

4 Smart Ways to Finance Your Car Loan at Lower Costs

1. Understand Your Credit Score Before You Go to the Dealership 

Checking your credit report and score is the initial step toward obtaining an appropriate vehicle loan. Dealerships frequently promote extremely low financing rates on new vehicles, sometimes as low as 0%.

They leave out in the tiny print that these prices are only accessible to auto purchasers with excellent credit, which might imply a credit score of 750 or above.

Even if you have a bad credit score, dealers and banks will "grant you" a vehicle loan. That's because they know they'll earn a lot of money off you by charging you a lot of interest, and if you don't pay, they may seize your property at any moment.

Buyers with credit scores in the low 700s may still be able to acquire a reduced interest rate, but they may not be eligible for the best deals. After that, rates quickly climb. If you have a below-average credit score (under 650), you may be offered auto loans with interest rates of 10% or more.

The lower your credit score, the more crucial it is to search around for the best deal a bank can provide you. Yes, you may be required to pay more than someone with a better credit score, but you may not be required to pay the first rate offered.

Thinking About Getting a Car? What You Need to Know About Car Financing

2. Keep the Term Short

Regardless of your credit score, a dealer will always try to sell you low monthly payments, zero down, and long car loan terms. This is the opposite of what you want because, in the long run, you are shooting yourself in the foot. 

Lower monthly payments are a manipulative and old-as-dirt sales tactic. The longer you take to repay a car loan, the more interest you’ll pay. Many times banks will charge higher interest rates for longer loans, further increasing your cost of credit.

It’s tempting to stretch out an auto loan over five or even six years to get to a more comfortable monthly payment, but this means you’ll pay a lot more in interest and almost certainly be upside down on your car for nearly the life of the loan.

3. Put 20% as Down Payment

The key to paying a lower interest rate is by minimizing the principal. Place at least 20% down on your new car so that you can reduce your principal and thus the total amount of interest you’ll end up paying.

If you can’t afford to place 20% down on the car you intend to purchase, chances are that you probably can’t afford the monthly payments plus interest over the course of the auto loan.

4. Forgo Gap Insurance

Gap insurance (guaranteed auto protection insurance) is a type of insurance sold by car dealers and lenders to cover the "gap" between what an insurance company believes your automobile is worth and what you owe on your car loan if you're in an accident and the insurer considers the car a complete loss.

For example, you crash your car and the insurance company pays out $10,000, but you still owe $12,000 on the loan. Gap insurance would cover the remaining $2,000. 

The issue is, that you shouldn't need gap insurance if you structure your vehicle loan properly, with a 20% down payment and a three-year term. There should never be a situation where you owe more than the automobile is worth if you have acceptable loan conditions.

If your dealer is putting a lot of pressure on you to get gap insurance, it's a hint that your loan terms need to be re-evaluated.

Key Takeaways on Lowering Your Car Loan Costs 

Unless you acquire a vintage car, your automobile is a depreciating asset, not an investment. In reality, most automobiles will depreciate by 50% in five years. As a result, you should try to pay off your automobile as quickly as feasible. 

Dealers will attempt to persuade you to take out a loan with a low down payment, cheap monthly payments, and extended terms (four, five, even six years). Why? Because they and their lenders will profit handsomely from your interest payments.

The longer you wait to pay off your automobile loan, the more likely it is that it will go "underwater" or "upside down," which means you will owe more on the loan than the car is worth (also known as negative equity).

That's a terrible situation to be in since even if you sell the car tomorrow, you'll still owe thousands on a vehicle you don't own.

That’s not to say that all auto loans are bad. Most of us use cars to get to our jobs and don’t have the cash lying around to buy a reliable ride, so we need a car loan. The key point is: an auto loan should help you get a car that you can afford, not one that you can’t afford. 

Photo by Mike