1. Get a copy of your credit report. Even if you make perfect payments and think you have the perfect FICO score, order your credit report anyway. Over 70% of all credit reports have errors on them, and a lowered credit score will drive up the interest rate on your auto loan and cost you hundreds, maybe even thousands, of dollars over the life of your loan. It may take up to 60 days to repair those errors, and you will want them fixed before you apply for an auto loan.
Scam Alert : Some unscrupulous auto dealerships may tell you that when they brought up your credit reports, your credit score was so low that you will have to be charged a higher interest rate on your loan, even if your score was actually very high. They may do this because auto dealership loans are usually immediately sold to banks with the agreement that the interest will be shared, and so they benefit from giving you the highest interest rate possible. Bring a copy of your credit report and FICO score with you so that you can smack them over the head with it. Also, you can then demand a better interest rate. Better yet, follow step number two and avoid dealing with auto dealership financing altogether.
2. Get pre-approved for an auto loan. If you wait until you get to the dealership and ask them to handle it, you may be there for hours as they scramble around to find you financing. You may also be subject to the next Scam Alert.
Scam Alert : Auto dealerships usually have three days to find your financing for your auto loan. They will often convince you to take the car home anyway, even though it is not yet paid for. Then they will call you up with a less-than-pleasing loan offer with the assumption that you will have fallen in love with the car and won’t want to return it. Prove them wrong and return it. They will get you better financing.
Rather than sit for hours on end at the dealership waiting for inferior new car financing, take the time to shop around at your bank or credit union and online at various loan websites. This way you can compare interest rates, pre-payment penalties (there shouldn’t be any), down payments, and the total cost over the lifetime of the loan (how much you will have paid at the end of the loan term, both in principal and in interest). You will also know your maximum loan amount, which lets you know how much car you can afford. Finally, having a pre-approved loan will give you leverage in negotiating the final cost of your new car.
3. Know the Kelly Blue Book trade-in value of your old car if you intend to trade it in. The Kelly Blue Book is a listing that shows the fair market value of all new cars, used cars, trade-ins, and private sales. Do not accept any trade-in offer from the dealership that is below this value.
Do not trade-in a car whose value is less than what you owe, unless you know that you can come up with the difference. Otherwise, you will be stuck making payments on two auto loans.
Scam Alert : Some dealers will pay you a low trade-in value for your car and then conveniently forget to pay off the loan amount you still owe on the car in a timely manner. Soon you start getting collection calls from your lender, because the loan is still in your name. Make sure that you get IN WRITING that the auto dealer will pay off your loan within ten days.
4. If you do decide to let the dealership find your financing, make sure they spell out everything included in the loan, the length of time you will be making payments, and what the final cost will be when you’ve made your final loan payment. It does not do you any good to insist you won’t accept a car payment over $225 if the dealer just extends the loan for seven years instead of five so he can still charge you a higher interest rate. If you do have to settle for a higher rate because of poor credit, be certain that the company has no pre-payment penalty and that they are willing to refinance the loan after you’ve made on-time payments for a while.
If a lender has a pre-payment penalty attached to your new car financing, then they can charge you a fee if you ever refinance the loan or otherwise pay it off early. They do this to guarantee that they don’t miss out on all that juicy interest they collect within the first few years of your loan (you do know that the majority of your payments within the first couple of years will go only to interest, right? Many people are shocked to discover that after two years of making hefty car payments, they still owe almost the same amount on the loan).
Some lenders will not refinance your loan, ever, which means if you want to refinance you have to go through a different lender. Because you are paying a high interest rate, you will often find after a year or so that you still owe much more than what your car is then worth. A new lender will expect you to make up the difference before they will give you a loan, and may even require extra so that you will owe a certain amount less than what the car is worth. For example, if the pay-off on your loan is $17,500 and your car is only worth $14,000, the lender may ask for $3,500 before they will refinance the car for you. If they want you to owe less than the car is worth, they may ask for an additional $500-$1000. It is much easier to simply make sure your original lender will refinance the loan themselves.
5. Be prepared to walk away. Even if you are desperate for a car, you must be willing to walk away from a bad deal. Auto dealers know when customers are desperate and they often prey on this . Like sharks, they can smell blood in the water, even at a one part blood to one million parts water ratio. If you can say no to a bad deal, you are more likely to get reasonable terms on your new car financing, even if you have poor credit. You are also more likely to get a good price for your new car.
Few experiences are as intimidating or frustrating as buying and financing a new car. The more you prepare yourself and gather information, the better chance you have of coming out victorious.
By Alisa Elizabeth King Terry