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Closing the deal on the best auto loan

Written by Liane Yvkoff

You’ve seen them in the newspapers or heard them on the radio: ads promising zero percent financing on auto loans. But keep in mind that if it sounds too good to be true, it probably is, because only consumers with the best credit score--typically 720 and above--qualify for the lowest interest rates.

But even if you don’t qualify for promotional rates, you can ensure that you get the best rate available to you by shopping around and arriving at the dealership equipped with your credit score and pre-approval from one or more lenders.

Know the average rates

The best way to know if you’re getting a good rate on an auto loan is to know the average national rate that lenders are offering. Average rate information is available through financial websites such as Bankrate.com, but your local rate may be higher or lower depending on your geographic location. However, auto loans are tied to the interest that the federal government pays on short-term Treasury bills that fluctuate frequently, and when you find an auto loan that works for your budget it’s a good idea to lock in the rate.

Shopping around

Buying a car on impulse and without shopping around gives the dealer all the advantage, because unless plan on paying cash you’ll need their financing to drive away with a new car. Alternatively, you can request a purchase order that you can take with you to a bank and apply for a loan. But if you don’t want to wait for loan approval and you want to avoid marked-up dealership financing, shop online for an auto loan, and inquire with several lending institutions on their available rates. If you qualify for a loan with more than one lender, you can negotiate for a better rate the same way that you negotiate the price on the car. But before you fill out an online form and hand over your personal data, ensure that you’re working with a reputable lender on a secure site.

Prepare for the F&I room

At a dealership, the car sale doesn’t end when finish negotiating the car price. Dealers can make as much money in the second half of the sale in the Financing and Insurance room where sales associates will attempt to sell you everything from an auto loan and car insurance to rust proofing and undercoating. All incidentals that you buy in the F&I room will add to your monthly car payment, and if you decide to purchase a car loan through the dealership, you should arrive armed with comparable rates to know if you’re getting a fair deal.

Buyers’ biggest mistakes

Purchasing a new car with an auto loan is a serious financial commitment that you shouldn’t take lightly. Finding the best auto loan can save you thousands of dollars over the lifetime of the loan. To save money on an auto loan, avoid these common mistakes:

Not cleaning up a credit report. Your credit score is based on several factors, including payment history, amounts owed, length of credit history and types of credit used. But a clean credit report is a good indication that your score will be high. Routinely review your credit report from each of the three national credit reporting agencies for errors and challenge any information that may negatively impact your score. Creditors have 30 days to respond to verify or correct an error or purge the item from your record.

Not getting pre-approved. Getting pre-approved with an independent lender is the best way of negotiating with the dealer on the price of the vehicle. A lender that has granted pre-approval may share with you your credit score, which will enable you to gauge whether or not you will qualify for the elusive zero percent financing.

Not doing the math. When purchasing an auto loan, don’t rely only on the monthly payment to determine if the loan is a good product. You should take into consideration the length of the loan, the total interest paid on the lifetime of the loan, and any loan origination fees or pre-payment penalties. Generally, the lowest rates on auto loans are available on short term loans, from 12 to 36 months, which can create a large monthly payment but include the smallest amount in interest. Longer term loans may come with higher interest rates, but be sure to total the interest you will pay on top of the vehicle price, and if you don’t like what you see, keep negotiating the interest rate, increase your down payment, or consider a shorter term loan.

Not refinancing to a better rate. Refinancing an auto loan is an often overlooked strategy that consumers can use to help them lower their payments. If you purchased an auto loan with a high interest rate because of poor credit and your financial situation has since improved or rates have dropped, inquire about auto loan rates with alternate lender. Fees for refinancing are generally small, if any, and if you identify a better rate, you can use the information as leverage to compel your current lender to match or do better than their competitor’s rate.