Should You Get an Auto Loan From the Dealer?

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When you’re shopping for a vehicle, the last thing you want to do is spend more than you have to.

Car dealerships in the U.S. long ago created a reputation for themselves as shady, slick negotiators — eager to squeeze every dollar they could get out of naive or unsuspecting customers. They’re just waiting for an inexperienced buyer to come along, one who won’t know that a guy just bought the same car last week for thousands of dollars less. Right? Well, not necessarily.

I’m no fan of the hard sell, and you will encounter the hard sell at many dealerships across the country. But just because the salesman is really pushy doesn’t mean you can’t get a good deal. And getting an auto loan from the dealer doesn’t necessarily mean you’ll pay more.

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What to look for in an auto loan

Choosing your auto loan comes down to answering two key questions.

1. Will you be approved?

If your credit is good or better, you’re likely to be approved no matter where you apply. So identify the two lenders with the best rates and talk to both. Knowing that you are shopping around will frequently inspire the person you speak with to give you the lowest available rate right away – sometimes even lower than what’s advertised.

Once you know where the best deals are to be had, get pre-approved. This will tell you exactly how much of a loan you’ll qualify for, and at what rate. If your credit is average or worse, you may need to scout around first and find out which lender is likely to approve your application for a loan. Where a bank says no, a local dealership may say yes.

2. What’s the interest rate?

Brand-specific financing companies often push fantastic loan terms on certain makes and models of vehicles. U.S. News gives a list of the best loan offers on new cars by manufacturer here.

When you shop, remember to consider the dollar value of zero percent interest (or an actual cash rebate, for that matter). If you choose a car that requires a loan at a higher interest rate, you’re adding that amount of money to the price of the car. Only you can decide whether it’s worth it. At the same time, do your research to make sure that the low interest offer you’re considering is on a car that doesn’t have an artificially inflated price, particularly on used cars.

Local credit unions and smaller banks frequently offer lower than average rates to bring in business. And you generally don’t have to be a member to take advantage of these lower rates. But banks don’t always offer zero percent or one percent auto loans, so the bottom line is don’t write off dealer financing before the terms are on the table.

More car buying tips to consider

Before you decide whether or not you decide to shop with a dealer, there are several other important things to consider when you’re buying a car.

Don’t shop for the loan and the car at the same time.

Do your homework. Decide on the car first, and then negotiate the loan terms with whatever lenders are competing for your business.

Watch for hidden costs.

Read your loan documents slowly and carefully. Look for service charges, prepayment penalties, penalty rates and rate markups, particularly on loans from local dealerships. Read more about markups here.

Resist add-ons and upgrades.

Or at least know what you want before you get there. Most of the cars on a new car lot will have lots of options that cost extra but can be removed from the car and the price if you don’t want them. The same holds true for the extended warranty— you might want it, you might not. But you can usually make that decision separately, at another time. Just buy the car.

Use a buying service.

Enlist the help of an auto-buying service, especially if you can get it for free. Many banks negotiate best prices on behalf of their customers, with no obligation to secure the loan there. The beauty is that you walk into the dealership knowing the exact price of the car you want. No negotiating necessary. That’s great news for buyers who aren’t comfortable haggling, and for buyers who are suspicious of car salesmen integrity in general.

Focus on the out-the-door price.

Don’t let the sales person negotiate the MSRP or the monthly payment.

Know how long you’ll need to pay off the loan.

The more years you need, the more interest you’ll pay. If you can’t afford the payment on a 4- or 5-year loan, consider buying a less expensive car  to pay it off sooner.

Don’t agree to a financing condition.

If the contract is conditional on financing approval, you could be surprised in a day or two when the dealer calls and says you weren’t approved at the agreed-upon rate. Your loan just got more expensive, and you can’t get out of the new terms.

Take your time.

Don’t feel pressured to make a same-day decision. Be willing to walk away. You can even rehearse earlier in the day what you’ll say when it’s time to leave, so the words will come more easily.

Stay on top of your credit.

Unfortunately, bad credit will cost you. Loan options are usually quite expensive for consumers with low credit scores or blemished credit histories. But if you need a vehicle, make the best of it. Get something with a lower price tag and make all of your payments on time. If you manage the loan responsibly, and make all your payments on time, by the time the loan is paid off, your score could be significantly higher, opening the door for a great deal on the next car you shop for.

Kimberly Rotter
Kimberly Rotter is a writer and editor in San Diego, CA. She and her husband have an emergency fund, two homes, a few vehicles, a handful of modest investments and minimal debt. Both are successfully self-employed, each in their own field. Learn more at RotterWrites.com.

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