Look at the entire deal: Here is a common car-buying mistake and one that gets people into trouble: focusing on car payments and ignoring other aspects of the deal. Shoppers who negotiate for a vehicle based on the monthly payments alone are often the same shoppers who end up paying higher interest rates. That's because the conversation doesn't focus on the details that actually make up the payment.
For example: I recently reviewed the sales contract of a young man who negotiated a car loan strictly based on monthly payments. The loan amount was $14,000. He knew his monthly payment was $340, but he was unaware that his rate on the loan was 18 percent. He was also surprised to learn that because of his interest rate, he was going to pay nearly $8,300 in interest charges over the life of the 66-month loan. Based on his FICO score of 640, he likely could have found a rate around 10 percent, and that would have saved him about $60 per month — $4,000 over the life of the loan. Had he focused on all aspects of the deal instead of just the payment, he could have potentially cut his interest costs in half.
The winning tactic, then, is to first nail down the selling price of the vehicle you're buying and the value of your trade-in (if you have one). After you've come to an agreement on those parts of the deal, shift gears and focus on the interest rate of the loan. Once you're clear on all those elements, it's time to talk payments. (To see the effect of different auto loan interest rates and loan terms on the amount of interest you'd pay over the life of a loan, check out the Edmunds auto loan calculator.)
Get preapproved: Consider getting preapproved for a new-car or used-car auto loan at your bank or credit union. If one of those financial institutions isn't an option, check to see if a credit card company with whom you do business offers car loans.
With an approved car loan in hand, you're not obligated to take a dealership's financing. Here's a pro tip: Don't initially tell the dealership that you have a preapproval. Go through the deal as you normally would and let the dealership make its financing offer. In some cases, the rate the dealership can provide will beat a preapproval from a bank or credit union. Choose the option that works best for you.
Shop around for your loan: This may be the most critical concept of the six. It's also the easiest to do.
According to a CPFB survey, only 50 percent of car shoppers reported that they had shopped around to find an auto loan with a better interest rate. Shopping different dealerships to find low rates isn't hard, and it can often be done with some phone calls. Another pro tip: If you're not happy with the rate being offered by the financing company of one car brand, consider shopping for a car from a different brand. That automaker and its lender may have different lending guidelines. This can be a real opportunity to save money in interest charges. The better your credit score is, the more options you'll have to select from.
If you're unhappy with the loan terms you've been assigned, you really should shop around. If you don't, you're probably leaving money on the table.
Take your time: Don't do all your car shopping in one day if you can help it. After a long day of test-driving and price negotiating, you may be worn down. Making a decision on a car deal when you're exhausted isn't a good idea. So if you're tired, go home and think the offer over. Sleep on it, if you like. The deal will almost certainly still be there in the morning, and you can make your decision when you're rested and clearheaded.