When my ex and I bought our first car together, I remember spending over 3 hours at the dealership to close the deal. The payments were WAY out of our budget, but that didn’t keep them (or us) from “making it work”.
But this is one of the worst things to do when buying a car. Why?
Because car dealerships need to make a profit, which means their loans come with standard interest rates and commission fees that are tacked onto the final price.
If you don’t do your homework, you could find yourself the victim of hidden fees and ridiculously high or fluctuating interest rates. Take it from my experience and don’t finance your car loan through the dealership.
While it’s very convenient and they’ll pretty much do anything to close the deal, it’s won’t be a sound financial decision in the long run. Instead do your research and use a few of these alternatives methods to finance your car loan.
You have to be careful with any type of loan choice, since not all lenders are created equal – and there’s always a bit of risk when you intentionally go into debt.
Here are some other options if you’re looking to get an auto loan for a new car.
1. Get a loan from a local credit union or bank
If you are thinking of taking out a car loan, the most cost effective ways to handle this, is to get one from a local community bank or credit union. For the most part, local banks have lower interest rates and since you’ve built up a rapport with them, you’ll have a higher chance of getting approved.
You can even get a discount if you already have an account/loan through the same bank, or sign up for automatic payments.
When I refinanced my auto loan, I got an extra 0.25% discount on my loan rate just for having the payment automatically deducted out of my checking account.
2. Save up and pay a large down payment
Consider treating your car like a house and save up at least 20% of the purchase price in cash, for a down payment. In the past when I’ve bought a new car, I saved up 50% down. But not everyone has the option to do this, so putting at around 20% down is a smart strategy too.
The extra down payment will be your best defense against the massive depreciation that many new cars experience when you drive them off the lot.
It also puts you in a better bargaining position since “money talks” and waving thousands of dollars in cold hard cash is hard for any car dealer to pass up.
3. Refinance your loan
If you did finance your car loan through the dealership, like I did, you’ll want to refinance the loan as quickly as possible. I waited over 18 months before realizing the interest rate was robbing me blind and decided to talk to my local bank about refinancing.
The process was quick, easy and I started saving money on excess interest payments instantly every month. Not only that, it cut several months off the payment plan of the loan!
You can’t go wrong with refinancing through a local bank or credit union to get a better interest rate.
4. Try creative funding sources
If your bank or credit union won’t give you a loan or offer a refinance deal, you’ll have to look for alternate sources of funding. If you have decent credit, try a peer-to-peer lending network like Lending Club or Prosper.
Or you could also consider taking advantage of a credit card with a balance transfer offer. You might be able to get a low introductory APR of 0% for a period of 6-12 months which could save you hundreds of dollars on interest fees.
Now before you choose any of these other options, remember that they can be risky, and you should be cautious when taking out loans or transferring balances between accounts.
However, if used correctly, you could pay off your car loan in half the time and save a ton of money.
Have you ever financed a new car through the dealership? What was your experience like?