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How to Save on an Auto Loan

  • 4 min read

Most people need transportation and since vehicles are expensive, this often involves financing. While many people focus on the sticker price, few factor in the financing, which can add substantially to the total cost of purchasing a vehicle.

Fortunately, there are several steps you can take to reduce the cost of an auto loan! Being proactive and utilizing the tips below could save you thousands over the life your loan.

1. Review your credit score BEFORE starting your vehicle search.

It’s important to know where you stand financially before getting your heart set on a particular vehicle. The first step is reviewing your credit score since it’ll be the primary factor determining the interest rate on your loan.

Auto dealerships often advertise very low interest rates, some as low as 0%! They do this to get you to the lot, knowing that most people won't actually qualify for the best rates. In fact, most of these super low interest rates require an excellent credit score of 750 or higher! 

Don’t worry, even if you don’t have great credit, you can still qualify for a decent interest rate. If possible, however, it’s recommended to wait and get your score to at least 650 for the most favorable financing options. 

It may be in your best interest to wait a few months even if you already have decent credit since it’s possible to raise your score by 50-100 points relatively quickly with just a few simple steps like paying paying down a high interest credit card or consolidating other debts. This will ensure you receive the best available interest rate and save as much money as possible over the life of the loan. 

2. Get financing quotes BEFORE going to dealership.

This is especially important if your credit score isn’t that great since rates can vary substantially. By being prepared with competing quotes when you walk in the door, the salesperson will know you mean business and skip straight to their best offers. 

Obtaining quotes from multiple lenders is super simple. There are several online services that allow you to complete one application and see quotes from several lenders at once. You don’t have to use these lenders if the dealership makes a better offer, but at least you’ll be armed with the knowledge to negotiate the best deal.

Local banks and credit unions can also provide quotes before you go to the dealership. If fact, if you have below average credit, they’ll likely provide the best quote. Use this quote as a bargaining chip with the dealership and they may go even lower than you thought! After all, dealerships make most of their money from financing, not the actual sales price, so it’s in their best interest to do whatever it takes to get you to finance with them instead of someone else.

3. Reduce the term of your auto loan.

By keeping the length of your loan as short as possible, you’ll save a huge amount in interest over the life of the loan. If you can afford the higher monthly payment, not only will you reduce the amount of time that you'll be paying interest, but you’ll also likely qualify for a lower rate, which equals even more savings!

When negotiating financing, most savvy dealerships focus on the monthly payment rather than the total cost of the loan. They present longer term loans that provide an attractive low monthly payment to distract from the astronomical interest costs over the life of the loan.

Remember that a vehicle is a depreciating asset and while stretching out the loan for the low payments may be tempting, you’re basically guaranteeing that you’ll soon be upside down on the loan. This means you’ll owe more than the vehicle is worth because the value will decrease faster than you pay it off. So not only will you be paying thousands more in interest, but you may eventually be stuck owing more than you can sell it for.

4. Make a down payment of at least 20%.

Making a substantial down payment protects you from getting upside down on your loan and may allow you to qualify for a better interest rate. Regardless, financing less of the purchase price will almost always result in lower financing costs overall since you’ll be paying interest on a smaller amount. 

Many dealerships often don’t require a down payment, even for people with less than stellar credit. It’s in their best interest since you’ll be more likely to purchase and they’ll make more profit over the life of the loan.

While driving off in a shiny new car with no money down may be tempting, always put a little down if possible. If necessary, putting off the purchase until you’ve saved enough to do so will pay off huge down the road.

5. Avoid the “extras.”

The salesperson will likely try to upsell various add-ons before finalizing the deal. These can include things like extended warranties, service packages, and gap insurance.

Gap insurance, for example, stands for guaranteed auto protection, and is designed to cover the “gap” between what your auto insurance will cover and the actual value of your car if you’re in an accident and the car is a total loss. 

Many people purchase these extra protections out of fear, but if you structure your loan correctly using the tips provided previously, gap insurance and extended warranties are usually not necessary.

6. Pay for taxes, fees, and other miscellaneous expenses with cash.

As with most large purchases, there will be various taxes and fees added to the purchase price. If you choose any of the add-ons mentioned earlier, they’ll cost extra as well.

It’s imperative that you pay these costs in cash rather than financing them along with rest of the vehicle. This is because these seemingly irrelevant costs will balloon over time with the added interest you’ll be paying. Taxes and fees of a few hundred dollars could easily turn into thousands over the life of the loan.

As a general rule of thumb, you should never finance anything that isn’t absolutely necessary. These miscellaneous fees fall into that category.



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