In my last post, I shared my tips for stress-free car buying. In this post, I’ll share some advice for stress-free car financing – that is, how to find the right deal to pay for your car. Since dealers now make more money selling financing than they do selling cars, it’s important to make sure you understand your options ahead of time.
New (or new to you) cars aren’t usually impulse buys. That means you probably have time to get your credit in order before you shop. A few point increase in your score can make a big difference in your car loan rate (or whether you’re approved at all). Start by checking your credit report for free at annualcreditreport.com to make sure the information is accurate and up-to-date. You can also use a credit monitoring site like Credit Karma, although the generic score they show you is not the same one lenders use to make their underwriting decisions. That’s because auto lenders use models that weigh your experience with auto loans more heavily.
Just like selecting your car, figuring out how you want to pay for it depends on your budget, how you plan to use your vehicle, and how long you want to keep it. There are three common options:
Very few new and less than half of used cars are paid for in cash. Most of us just don’t have $30K laying around. The advantage of paying cash is that you don’t have to make car payments – the car is yours right away. The disadvantage is that it puts a big dent in your bank account and might reduce your ability to afford any emergencies that arise.
Leasing a car is like renting a home rather than buying one – you pay for the privilege of using it, but don’t own anything when the lease ends. Usually, the lease will restrict the number of miles you can drive each year for a certain number of years.
Most car buyers use a loan to buy their cars, and that makes sense. We advise most car shoppers to choose a loan over a lease for two main reasons: 1. leasing limits your options. Most banks and credit unions don’t offer leases. That means you usually have to use captive financing (like Toyota Financial Services), at whatever rate that lender is willing to provide. If you have less-than-perfect credit, it can be hard to be approved, and you may be stuck paying a lot of interest.
Second, leasing means you’re never “free and clear.” Surcharges for mileage or wear and tear add up, and you can’t dispute the dealer’s assessment at lease-end. That’s especially problematic if you intend to keep the car for over 3 years, drive more than 12K miles/year, or have kids or pets you drive around.
If you decide a loan is your best bet, how do you make sure you get the right deal without unnecessary stress? Shop around before you go to the dealership. If you like your bank or credit union, check their website for rates. Websites like Outside Financial allow you to compare loan options from multiple lenders without affecting your credit. If you find the right loan for you, you’ll know what you can afford and you can complete all of the paperwork on your time, from your home.
What’s the best way to waste your time, raise your blood pressure, and force you to over-spend by an average of nearly $1800? Let the dealer arrange your financing. It may seem more convenient, but it’s almost always your worst option. The Finance & Insurance folks at a dealership are among the highest-paid and best salespeople, and they will do their best to make sure you leave with the financing package that’s best for them, not you. They don’t have any legal obligation to disclose how much they’re marking up your loan, and good luck getting them to explain your options. That’s why I advise going to the dealership only when you’re ready to pick up your car, with everything else already arranged.
In my next post, I’ll describe the various “ancillary products” that dealers try to sell you with your loan, and which ones might be worth your money.