The surge in auto sales over the past few years has also led to new all-time highs in auto loans: in mid-2015 auto loan balances crossed $1 trillion, and they haven’t looked back – continuing to increase over the last couple of years. Cars have become more expensive, without household income growing as quickly (on average), so more and more folks are financing their vehicle purchase with a loan or lease, rather than paying cash. Understanding your options when it comes time to finance your vehicle purchase can help you save money and enjoy greater peace of mind while driving your car.
Arranging your loan at the dealership
The most common way that people use credit for a vehicle is to go to the dealership and they will have professionals (usually with a title like Finance Manager or F&I – Finance and Insurance Manager). These folks will work with the lenders that the dealership maintains relationships with to get you approved, and put together the loan or lease paperwork. This route is by far the most common – around 85% of all vehicles are driven off the lot with financing arranged by the dealership – and there’s no reason you cannot get a fair deal, but like everything else you should do your research and focus as much on getting the best loan (or lease) you qualify for, in addition to getting the best possible deal on the car itself.
First, like every other credit product we’ve described, your credit score and profile will be the biggest factor in determining whether you qualify and what rate and terms you can get. Therefore, you should know your score and what’s in your credit report before you go to the dealership, so there are no surprises. The dealer will likely “pull your credit” (make a credit inquiry) to determine which of the lenders they maintain relationships with are likely to approve you and provide the best rates and terms given your credit profile. Then, the lenders the dealer sends the credit application to will also pull your credit and make a credit decision, and provide the rates and terms for the approval, if you qualify. The dealer is not obligated to tell you your credit score, the lenders he/she sent your application to, nor the specific decisions and terms they received back from the lenders. You are welcome to ask – and you should – but you also should know your credit in advance to make sure you are getting the credit you deserve. Also realize that dealerships make money for the service of arranging the loan for you – this is fair, they’re performing a service – but when they present the loan terms to you, feel free to ask if they are earning compensation for arranging the loan, and if so, how, so that you know if you’re getting the best deal for you, and not just the best deal for the dealer.
Second, many dealers allow you to begin your credit application on their website prior to your visit to the dealership, and this may be something you will want to do – so that you know before you go what you’re likely rates and terms will be, and you can ensure that the car you want to buy really will fit your payment budget. Be sure to read the terms and conditions of the application to know what they will be doing with your data (specifically if they will pull credit or send your info directly to lenders), and be sure you’re OK with their process. But you should do that every time you submit a credit application online, regardless of what type of credit or loan it’s for.
Arranging your own loan before going to the dealership
If you’re going to want to do research and preparation to get the best possible loan, you can always do just a few more steps and apply online directly with 1 or more lenders and get your loan pre-approved before you go to the dealership. By doing this you are in control of your loan, and you will know what you qualify for before you go to the dealership. Plus, you can do this before you complete your online research – so you can focus more on cars that fit your budget.
If you have excellent credit you have a chance to get the best available rates by arranging your loan directly with your lender, but you may miss out of getting a promotional rate (like 0% APR) since the finance companies that offer those types of rates usually only offer them through the dealership. But just be sure to make this part of your research.
If you have less than perfect credit your lender will likely need to see documents that substantiate your income (like a recent pay stub) or other items, and these would need to be verified with your loan documents by the lender. If you work directly with your lender they may have a process that allows you to submit the documents directly to them so you don’t need to bring them to the dealership too and share those kinds of personal details with your car dealer.
We recommend our partner CarsDirect, who can submit your application to multiple lenders and help you get multiple offers in advance, and who can be especially helpful for applicants with bad credit, and also provides services to help in your car shopping research.
Refinancing Your Auto Loan
A lot of people don't know that they can refinance their auto loan, but this is a growing industry segment, and there are a number of companies that focus specifically helping people refinance their auto loan to save money month to month by reducing the payment, and/or reducing the total interest paid by reducing the interest rate and keeping the same term.
Generally speaking, the higher the interest rate the greater the potential savings because a low interest rate loan is mostly principal paid each month. However, if your credit has improved since you took out your car loan, and you've been paying the loan perfectly, you can likely save money by refinancing the loan. If your credit was already excellent and still is, you might realize substantial savings if your vehicle purchase included an incentive (rebate) for financing with the manufacturer's preferred finance company (called the captive finance company). By taking the rebate you likely didn't get the lowest available rate, but if you refinance you can get both the rebate and a new lower rate for the rest of your loan - having your cake and eating it too!
Loans for Vehicles Bought from Private Sellers
If you want to purchase a vehicle from a private seller you'll likely get a better deal for the same vehicle than if bought from a dealership. Obviously, there's some risks involved, and the dealer has likely reconditioned a car to give it a "like new" feeling that the private seller cannot match. However, if your confident in the car, the seller, and the deal you're getting then go for it!
Of course, the last remaining sticking point for a lot of folks has been getting a loan. There are many fewer lenders that will allow you to use the loan proceeds to purchase a vehicle from a private seller. However, there are some, and if this is a route that makes sense for you, don't let obtaining financing get in the way.
Leasing a Car
An alternative to financing the purchase of a vehicle with a loan is to lease the vehicle. When you lease you have a shorter term of payments (compared with the average car loan term), usually lower payments, and you don't need to worry about selling the car or trading it in when you're ready to move on to something else - the lessor will take care of that. If you're interested in leasing we highly suggest you take a look at Lease Wizard, another publication by the same publisher as Credit Wizard.
Leasing is mostly done for new cars, and only by people with excellent credit, but there are exceptions to both of those: people with imperfect credit can lease, and you can lease a used car. There are even ways to set up a lease so that you don't need to make any monthly payments. This is all covered in detail at Lease Wizard if you're interested in learning more.
Finding Your Perfect Car
Once you've figured out the loan payment that fits your budget and reviewed your credit to make sure there are no mistakes, the next step is to find the best car for you that meets your driving needs and also fits your budget.
If you're considering buying a used car, either from a dealer, or especially from a private party, you'll want to get a vehicle history report to make sure you know everything you can about the car - potentially more than the person selling it if it's not the original owner. This will help you root out any issues before you buy it, and save you potential headaches down the road. We recommend getting a vehicle history report.
If you're looking to purchase vehicle, you can check out our partner CarsDirect, who can help you get a price quote and enable you to complete your financing application conveniently and securely online as well.
If you're instead looking to sell a car, check out Cars.com.