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Getting Your Best Car Loan - Tips & Tricks

So, you are looking for car and you need a loan? Getting a car loan could be very daunting, emotional and often times expensive experience. When you are buying a car – new or used – there are usually not one but three micro-sales happening under one sale roof. Subsequently there are three points to negotiate:
  1. Car Price
  2. Car Trade-in Value
  3. Financing
Most salespersons in auto dealerships will try to merge them in one and negotiate with you only ONE final price making their additional money on margins of each of three micro-sales listed above. Make sure that you understand this sales trick and counter act properly.

Car Price

  1. Check for the Right Price
    If you are buying a new car - always check the Car Invoice Price not the MSRP (sticker price). Invoice price is usually much lower than MSRP.
    If it is a used car – make sure to check Check Your VIN Instantly , or services first to get a car history report to confirm that you are not buying a lemon. For example, there are plenty of recent flood damaged-and-repaired “like new” cars in the market with astonishingly low price which you won’t want to buy. Make sure that you are not getting one of them.

    Finally, check KBB (Kelly Blue Book) for the objective market price of that used vehicle. Once you know your future car’s value – move to step #2.

  2. Check for Consumer and Dealer Incentives
    Ask for first-time-buyer discount, manufacturer-sponsored discount or dealer specific discounts / programs such as reduced pay rate or cash back values (do you remember that famous – “put down $4K we will add $4K from us” ?). Don’t make any financing decisions at this stage - keep in mind that dealer financing being very convenient isn’t necessarily the cheapest.

Car Trade-In Value

  1. Know Your Old Car’s Trade-In-Value
    Make sure to check Kelly’s Blue Book or anything similar for re-sell value of your car. Some dealerships offer car buy-back programs promising you a price for your car better than KBB value in exchange for selling you a new car. That over-the-KBB-delta is usually 10% of KBB value and could sound attractive for many car buyers. However don’t get over-excited here – there is a law of nature: “something never comes from nothing” - car manufacturers often offer a solid discounts for each new car sale. These manufacturer-backed discounts usually are not publicly advertised by auto dealers. Many dealers simply take a part of that manufacturer-backed incentive and make this part a 10% discount for you. Check if manufacturer-backed incentive taken separately is greater than 10% KBB discount dealer offers to you. If you ask your dealer right questions and act correctly you can save some thousand dollars here.

Car Financing

  1. Know Your Credit Score
    While there are always ups and downs in loan market the better credit scores always lead to better loan rates. To get a better understanding of score-rate dependency check the following real data table from Year 2012:
    FICO ScoreInterest Rate
    720-850 5.73%
    690-719 7.37%
    660-689 9.40%

    As one can see from the table the interest rate paid by customer with FICO score in 500-589 range is more than 3 times greater than for customer with FICO score of 720-850.
    Once you know your FICO score you can get your expected up-to-date interest rate - there are a lot of free resources for that in the internet. To calculate monthly payments for given interest rate, loan term and total loan amount you want to borrow use the loan calculator on the right.
  2. Shop for the Best Loan Around
    • Don’t Buy a Loan Based on How Close Is Lender’s Office to Your Location
      Don’t forget – you are shopping for money not for geo convenience. Besides that – many loans are available online nowadays, so location really doesn’t matter anymore.
    • Choose the Right Rate
      Never work with one single lender - shop around and get at least three offers from different lenders. Choose those lenders from different lending categories - let banks, private lenders and other financial institutions compete for your business.
    • Choose the Right Loan Term
      Normal loan term is usually from 36 to 72 month. Some lenders will try to sign you off for very long term loan of 7 or even 10 years – don’t go over 6 years unless it is absolutely necessary for you.
    • Make sure that there is no pre-payment penalties in your loan offer so you would be able to re-finance your loan in future for better rate if needed.
  3. Get Your Loan Pre-Approved First
    Knowing what you are eligible for will help you a lot in choosing the right car to buy. When asking for loan amount know your affordability limits. There is a rule of thumb: all your loans together, i.e. - home loan, student loan, auto loan etc. - should not be greater than 25% - 35% of your gross income before taxes. If you already have a mortgage for your house ask your mortgage provider about joined mortgage + auto loan option – this option is always much cheaper than two loans purchased separately.
  4. Know the Real Cost of What You Are Buying
    Your real cost isn’t a car cost only. Don’t forget auto insurance: the real price you will pay is monthly auto loan payments + monthly insurance premiums where insurance premiums can be even larger than your auto loan premiums. Cars which are still in financing or in lease will likely require a Full Coverage in your insurance policy which can be very costly.
  5. Choose the Right Loan Type
    If you buy a car from the individual and need a loan - you might need to go to bank as many small lenders won’t provide auto loans for that type of purchases. Personal loan (not the auto loan) could be another solution here. Many private lenders can lend you money for any kind of purchase as long as you are a “lendable” person. Those loans are usually of higher rate and are for smaller amounts than ordinary auto loans but they could be a viable solution for you here.

    Once you have all pieces together – make your final purchase decision. Driving is very enjoyable experience. So enjoy your new car and drive safely.

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