How to Finance a Car

Financing a Car may seem like a “no brainer”, and it really should be.  The following are tips with regards to “how to finance a car” which will save you hundreds, if not thousands of dollars!

Customers have a few options including financing through the dealership, obtaining outside financing from a bank or credit union not affiliated with a dealership, or paying cash (which really isn’t financing).  Today with credit readily available and aggressive rates most customers chose the former- financing.

More times than not customers are so worried about the price of the vehicle and the payments, they overlook probably the most important part of the vehicle purchase transaction- financing.   Rates can effect payments dramatically and looking for the best rate may take a little leg work.  The last thing you want to do is take a dealer’s word for it and accept the first rate they offer, with the exception of very low interest rates, or sub-veined rates as the manufacturers like to call them (0%, 1.9%, etc).

Shopping for the best interest rate requires a few steps:

  1. While in negotiations with the dealer ask them the finance rate on the vehicle you are purchasing- note that on new cars the rate is usually better than used car rates.  Most likely they will say it depends on credit.  If this is the case, give them a rough estimate of your financial picture.  If the dealership insists that they cannot give you a rate without checking your credit then skip to step 2.How to Finance a Car
  2. Contact your local bank or credit union.  If you feel comfortable with the representative and they cannot give you a rate or if you are between tiers (tiers are essentially a block of rankings that financial institutions use to provide rates.  “Tier 1” or “A” is typically the least risk, thus the most likely to get the banks best rate) then have them pull your credit.  However, I would be as upfront as possible about your financial picture.  In doing so, the bank or CU usually is pretty close with regards to the actual rate.
  3. If you don’t have a credit union, and didn’t contact one in step two, then search for one.  Approximately 80% of the time the Credit Union has the BEST RATES and more lenient financing.  Just Google “Credit Union (insert city) (insert state)”  Some may have a small fee or membership rules like lending areas.
  4. Take whatever rates you get and call the dealership.  Present the rates and state these words exactly “I can get a rate of xx.x% through my bank, but if you can beat it, I would like to give you my business.”  This will typically get a finance manager working as the dealership gets paid a “FLAT” fee of usually $100 dollars.  If you finance through another bank then the finance office has NO CHANCE of selling you gap insurance, and a less likely chance of selling you service contracts, credit life and disability, or any other products they offer.

So, to reiterate step 4, the dealership GETS NOTHING in terms of a flat fee, or gap insurance, and has a less likely shot of selling you any other F&I products.  It’s in their BEST INTEREST to have the financing go through them.  DON’T FEEL BAD!!! It’s YOUR MONEY!  Dealerships are essentially brokers for Banks and Credit Unions so that’s why it may be a good idea to go through a dealership.  Most dealers have 5-10 banks they deal with.   Therefore, the finance manager knows who has the best rates and specials for the given time period.  Be stern and if the dealership really cannot beat the rate from your current bank or credit union then you will be left with no choice.

Keep in mind that dealerships ALWAYS try to bump up the finance rate from what their “buy rate”.  So, if  after submitting your credit application to the bank, the dealer will get a “buy rate” which is essentially a wholesale rate.  Typically for a 60 month loan term the dealership will be allowed to bump the rate 2.5-3.0%!!!  This can be significant depending on the total financed amount.  So, an example may be:

Dealership gets a buy rate of 2.9% for 60 months
Customer gets offered a rate of 5.4% for 60 months
Dealer the will get a percentage (typically 80% of that difference)
80% of 250 basis points or 2.5%

That essentially means BIG MONEY and a significantly profit center for the dealership!

Please feel free to visit HONEST CAR for all of your Car Buying Tips

January 31, 2011 by Jamie Rettig