CHARLOTTE, N.C., November 27, 2006 - Like most financial transactions, getting the right car loan comes down to doing a little bit of homework and shopping around for the best deal. According to Bridget Smith, editor in chief of the LendingTree.com Smart Borrower Center, there are several things to keep in mind when looking to finance an auto.
Check your credit score
Before shopping for any loan, be sure to check your credit score and credit report, and 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, which should help you get a better interest rate on your loan.
Use your home equity
Tapping the equity in your home may be an advantageous 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 a traditional car loan 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 may offer the lowest initial interest rate but, because its rate is variable, it can leave you vulnerable to the possibility of increased payments if interest rates should rise. Therefore, it is usually more suitable for loans of 36 months or less. For loans longer than 36 months, a fixed-rate home equity loan that has a guaranteed rate for its entire term may be a better choice.
Arrange independent financing
Obtaining financing through an independent lender before you go car shopping can also provide savings. Dealer financing can be more expensive than a bank loan depending on your credit rating. In fact, sometimes auto dealers make more profit from the financing than from the actual sale of the car.
Many dealers start the negotiating process by trying to get you to tell them what monthly payment you can afford, which leaves room for them to bump the interest rate up to your 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 seven percent interest rate and a nine percent interest rate is slightly more than $900 over the term of the loan.
Be careful of zero interest loans
While no-interest loans can 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 your option is to 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 five percent, your monthly payment is $419.59. You save $24.85 a month, or $894.60 over three years.
About LendingTree, LLC
LendingTree, LLC is the nation’s number one online lending exchange, providing a marketplace that connects consumers with multiple lenders that compete for their business. Since inception, LendingTree has facilitated more than 20 million loan requests and $152 billion in closed loan transactions. LendingTree provides access to mortgages and refinance loans, home equity loans/lines of credit, auto loans, personal loans, and credit cards via www.lendingtree.com and 800-555-TREE.
Launched in 1998 with headquarters in Charlotte, North Carolina, LendingTree, LLC is part of IAC Financial Services and Real Estate, an operating business of IAC/InterActiveCorp (NASDAQ: IACI), which also owns or operates LendingTree Loans, LendingTree Settlement Services, LLC, GetSmart®, RealEstate.com®, Domania®, and iNest®.