Dear Kirk: I’m ready to think seriously about financing a new car. What do I need to know about auto loans before I make a commitment?
Kirk Says: Congratulations! You scored a deal on a new or used vehicle. Now your next bargain awaits you as you go to secure the money to pay for that vehicle. Assuming you are not the benefactor of a wealthy friend or relative that will front you the money for your new purchase, you are going to need a loan before the dealership will let you drive that beauty off the lot. So, the best place to start is with an understanding of the different places that one can turn to obtain financing for that new or used vehicle.
Stop 1: The Dealership
The majority of the dealerships you walk into will have means of providing financing for your new vehicle. Even small mom-and-pop dealerships will offer some type of financing—think “Buy Here, Pay Here” options. The key advantage with dealership financing to you, the consumer, is convenience. They will handle everything for you from the purchase agreement to taxes, tags and financing, allowing you to finish the entire process before you walk off the lot. Wow! Doesn’t that feel good?
But all this convenience comes at a cost. And that cost comes out of your pocket. Remember, the dealership has no incentive to find you the best interest rate. That’s why car salespeople ask the question, “What can you afford to pay each month for this new car?”
Stop 2: The Bank
So now you are saying to yourself, “The convenience is nice, but how much can I save by doing some shopping on my own?” Well, that depends. I’ve seen consumers save thousands of dollars over the life of a loan, and anyone should be able to save at least a few hundred dollars by shopping several different banks.
Lending institutions are competing for your business, but there is so much more going on behind the scenes. For example, one bank may have 10 times the amount of money to lend at a given time than another bank. What do you think they are going to do? They are going to put their loans on sale, which means better terms and conditions for you.
Stop 3: Credit Unions
If you are one of the nearly 1/3 of Americans that either belong to a credit union or have access to membership through your employer, be sure to shop your credit union’s terms and conditions on auto loans. On average, a credit union will provide 1 to 2 percent better interest rates than your typical bank.
Stop 4: Your Car Insurance Agent
This option may not be the one that comes to mind immediately when considering car financing, but many of the big players in insurance have banks or banking relationships and can assist you in obtaining vehicle financing. Some banks associated with these insurance companies even offer features of their loans that would cancel the total debt owed on the loan and pay your insurance deductible if your vehicle was totaled in an accident.
This is a tremendous value if you owe more on the car than what it is worth, and it can save you hundreds of dollars at the dealership by saving you the trouble of securing GAP (Guaranteed Auto Protection) coverage when you purchase the vehicle. The rates offered through banks associated with insurance companies are typically competitive with other banks.
Hopefully you are now more enlightened consumer and ready to go score your next best deal on the financing. Happy Shopping!
Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.