If consumers would spend an half the energy in researching car loans as they do in fantasizing about their dream car, they'd have a better chance of finding an affordable vehicle. It's not a disreputable practice for car dealers to hike interest rates or massage monthly payment requirements on a financing package to earn a profit – that's their business. But it's the borrower's business to make sure the loan suits his or her financial needs rather than filling the pocketbook of the dealer.
First Comes the Loan
For the best auto loan rates, consumers should first shop for financing from an independent lender. Many car buyers don't understand that they can secure a loan and lock in interest rates before they begin shopping for their cars. Dealers either accept the independent loan, try to talk consumers into their own financing (which means they might offer an even better rate), or let the buyer walk away. (Refusing to accept the buyer's financing can happen if the buyer's lender pays by voucher instead of by check. It takes much longer and can disrupt the dealer's cash flow.)
For any borrower, the first step in the process of securing the best deals on car loans is to calculate how much they can afford to pay each month. LendingTree's Car Payment Calculator crunches the numbers based on the loan amount, the interest based on annual percentage rates, and the term of the loan.
Calculate your monthly auto payment
Once the consumer determines how much to set aside each month for the auto loan, he or she should forget about the monthly payment going forward and focus instead on securing the best interest rate.
It's NOT About Monthly Payments
The total purchase price and loan amount are critical factors, because prepared buyers already know how much they can pay each month (and they should absolutely NOT disclose this to the dealer!). The down payment and length of the loan can be tweaked to meet a monthly payment objective, but the car and financing could still be overpriced. Dealers will ALWAYS try to get buyers to talk payments. Consumers should resist this.
It's About Equity
Meeting a monthly payment goal by extending the car's repayment term is a bad idea for the buyer, but a great idea for the dealer. To get that lower payment, the buyer pays a higher interest rate and pays it for a longer time, which adds to the dealer's profit.
The longer the term on a car loan, the greater amount of time it takes to accrue equity on the vehicle. The consumer is then more likely to be upside down in the first few years, with a loan balance that exceeds the value of the vehicle. The worst case is that if the car was totaled in an accident, the buyer might not get enough of a settlement to clear the balance of the loan -- owing money but having no car.
Online Is Easier
It's not as though car buyers have to pound pavement to find great deals on auto financing. By shopping for loans online, they can compare deals in a stress-free setting and get the best interest rates and smart repayment terms (experts recommend four years or fewer). Borrowers can get pre-approved by independent lenders for their loans and go into the dealership knowing ahead of time how much they can realistically pay for the car. Once pre-qualified, consumers may then shop for the car with enthusiasm and avoid haggling over financing details with the salesperson. Taking the financing off the table lets buyers focus entirely on getting the best price for the car.