Saving dollars on your next car loan comes down to a bit of shopping and avoiding the pitfalls. Here are some helpful tips:
Use your home equity
Tapping the equity in your home may well be the best way to lower your interest payments when financing a car. Both a home equity line of credit (HELOC) and a home equity loan often provide lower rates than traditional car loans because they are secured against the value of your home. The interest on home-equity credit is also usually tax deductible if you itemize it on your federal tax return. Consult a tax advisor about your particular situation.
Of the two choices, a HELOC often has the lowest initial interest rate but, because its rate is variable, it can leave you vulnerable to the possibility of increased payments should rates rise. It’s therefore often considered more suitable for car loans of 36 months or less. For loans over 36 months, a fixed-rate home equity loan that has a guaranteed rate for its entire term may be a better choice.
It’s important, however, before choosing to secure your vehicle loan against your home, to understand the risks involved with this type of financing. Because you are using your home as collateral, you must have the discipline to make all the necessary payments on time or you could end up in a position of having to sell your home.
Arrange independent financing
Obtaining financing through an independent lender before you go car shopping can also provide savings. Dealer financing is often more expensive than car loans through banks depending on your credit rating. Sometimes an auto dealer may even make more profit from the financing than from the sale of the car.
Many dealers will try to get you to tell them what monthly payment you can afford. This leaves room for them to bump the interest rate up to that monthly payment level. They can then sell the loan to a lending institution and receive a commission based on the difference between what you’re paying in interest and what the bank normally charges. This can be costly for you. For example, on a $20,000, 48-month car loan, the difference between a 7 percent interest rate and 9 percent is slightly more than $900 over the term of the loan.
Be careful of zero interest loans
Although no interest car loans sound attractive, they may not be your best bet, particularly if you’re giving up a substantial rebate in return. Let’s say you’re buying a car for $16,000 and can pay zero interest for 36 months through the dealer or receive a $2,000 rebate. The monthly payment on a $16,000 purchase at zero interest is $444.44. However, if you take the rebate and finance through a bank at 5 percent, your monthly payment comes to $419.59. You save $24.85 a month, or $894.60 over three years.
Check your credit score
Before shopping for any loan, be sure to check your credit report and score to correct any inaccuracies that may hurt your credit rating. Also, if you know well in advance that you are going to buy a car, you can take steps to improve your credit score by removing certain risk factors, such as unpaid credit card bills, that may be causing a negative impact. Lenders largely base the rates they charge you on your credit score. So, by improving your credit, you may be able to get a better rate on your loan.
Leasing became popular in the 1990s as a way for people to afford a new car at a lower monthly payment than purchasing the car outright. Since you are not paying the entire purchase price for the car, monthly lease payments are typically less than monthly loan payments. Some new cars can be leased for as little as $200 a month or less. The downside is you have no resale value after the lease expires.
Watch for lease specials to get the best deal. But make sure you read the terms of the lease, including whether the advertised monthly payment includes sales tax and fees. Also, you should consider whether you’re paying a larger than average down payment to secure the lower lease rate.