The least expensive way to buy a new car is negotiate the best deal you can and pay cash. This way, the amount you spend in total will be exactly what you negotiated (plus tax and license fees). The charges that come into play when finance the purchase or lease the car will be avoided.
However, the average new car transaction price is around $38,000 these days. While there are people who can cover that comfortably, others must finance a amount of that nature. With that in mind, here’s how to get a good deal on a car loan if — like us — you’re in that latter group.
Review Your Credit Report/Scores
Key to getting favorable financing in any sort of situation, your credit history will determine how much you’ll pay to borrow the money you need. Simply put, the higher your score, the lower the interest rate you’ll be expected to pay. However, you’ll only know if you’re being quoted a good rate if you know what your credit reports say you’re qualified to have.
You can get all three of your credit reports free of charge each year at AnnualCreditReport.com. Review them for errors, actions you don’t recognize or any other abnormalities. The goal is to be certain they accurately reflect your credit activity, which in turn will mean your credit scores are correct. These you can get for a fee from each of the three reporting agencies (Experian, Equifax and Transunion). With your scores in hand, you can find out what your corresponding interest rate should be.
Review Your Budget
This will be a lot easier if you’re already making a car payment, as it’s currently factored into your spending. However, you’ll need to figure out how much you can afford to pay each month if this is going to be a first time purchase.
The best way to accomplish this is to total your monthly expenses, along with the amount you put away for savings, investments and spending money. Compare the sum to your income and you’ll have a rough idea of the car loan payment you can afford to make. Remember cars also come with fuel expenses, parking fees, licensing fees and maintenance costs.
Whatever you have left after meeting all of those obligations will be what you can afford to pay for your car each month. You can then run the numbers in a loan calculator to get an idea of the price range in which you should be shopping to keep your monthly payment affordable, based upon the down payment you have saved up, the interest rate you can expect and the length of the loan.
It’s important to note you should be looking at a less expensive car if you’re having to stretch the term beyond 60 months to make the payment fit into your budget.
Shop For The Loan
It is important to concentrate this activity within a two-week period to minimize the effect lender’s inquiries will have on your credit score. Under most circumstances, your score drops a bit each time one of them checks your credit. However, multiple inquires are treated as one when they are for the same type of credit over a period of two weeks or so.
Be careful to ensure the length of the loan, the purchase price and down payment are the same on each one so you can compare like to like. Use a loan calculator to get an idea of the monthly payment you’ll be able to afford for a given loan amount.
Agree to accept the loan with the most favorable terms once you find your car. You’ll be offered financing at the dealership too, once you find it. Let them try to beat your pre-approved loan, being careful to make sure they match your in-hand deal exactly.
You’re golden if they can beat it.
Stick with the one you already have if they cannot.
Either way, you’ll get a good deal on a car loan.