Shopping for a car is exciting – and confusing. The emotions involved can lead to bad decisions, especially when one is tempted to take the easy way out.
A car dealer auto loan can seem like the easy way out. After all, having the dealer arrange financing saves you the process of having to apply directly to lending institutions, and it can seamlessly integrate the financing process with the purchase of the car. However, as is often the case in life, taking what seems like the easy way out at the time can end up costing you in the long run.
6 Things to Consider Before Taking Out a Car Dealer Auto Loan
Before you take the easy way out and trust your auto financing to a car dealer, stop to consider the following advice:
- Don't eliminate choice. Markets work best when consumers have choice. There are thousands of banks and other lending institutions in the U.S., and shopping around allows you to see who can offer you the best terms. Also, when lenders know they are competing for business, it makes them try a little harder. So why neglect those benefits of choice and simply hand your loan business over to your car dealer?
- Take ownership of your credit status. Car dealers will often advertise that they can help people with bad credit find financing, but this comes at a price. Between higher loan rates, fees, and the price of the car, a dealer can make sure people with bad credit pay generously for being extended credit. If there are issues with your credit, it is best for you to know first-hand what they are and try to address them, rather than pay a car dealer to add to those problems.
- Decide whether you want to pay a middleman for arranging financing. Car dealers are not in the business of doing something for nothing. If they are offering to arrange financing, chances are good that they are getting paid extra for doing so, either through their own financing company or through arrangements with lenders. In an era when the internet has made it so easy to shop for a loan directly, do you really want to cut the dealer in for some extra money out of your pocket?
- Don't commit on a payment method until the price has been locked in. Dealers like to play games by changing the price of the car depending on how you finance it. You can get better clarity on both the car's price and the financing terms if they are approached as separate decisions. Keep your options on financing open until the dealer has committed to a price on the car. That way, you can directly compare that price with what other dealers are offering for similar cars, and then separately start shopping for the best deal on financing.
- Review fees as well as the interest rate. Dealer ads often offer "low, low financing rates," but remember that there is more to the cost of a loan than the interest rate. Review a written disclosure of all loan terms before you commit to financing.
- Understand the impact of a longer loan. The car salesman wants to do whatever is possible to close a deal, and often that means making a car seem more affordable by stretching the financing out into a longer loan. While a longer loan may mean lower monthly payments, it can also mean a higher interest rate and it certainly will mean paying interest over a greater number of years. Don't commit to a loan term until you have reviewed a full schedule of all principal and interest payments you will have to make over the life of the loan. This will help you recognize the full cost of a longer loan. In particular, be wary of committing to a longer loan on a used car – you don't want your loan payments to last longer than the vehicle does.
None of the above should imply that a car dealer auto loan is necessarily a bad deal. The only problem is that you have no way of knowing whether it is a bargain or a bad deal unless you have something to compare it to. So, even if you are considering dealer financing, do a little shopping around first. Then, you can see if your car dealer can compete with the financing terms you found available on the open market.