(Illustration by Andy Zapata)
If you have five kids, a big dog and a limited budget, even the most charismatic car salesperson probably won't persuade you to buy a Porsche. Especially now, when it's possible to go online and research every aspect of a vehicle -- from the manufacturer's suggested retail price to its safety record -- before you set foot in a dealer's showroom.
But while many consumers spend hours searching for a vehicle that fits their lifestyle, they devote little thought to how they'll pay for it.
Car dealers are happy to arrange financing so you can go for a test drive, get approved for a loan and drive home ensconced in that new-car smell, all in one afternoon. And the dealer's rate may be lower than anything you could get on your own.
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There's no way to know that, however, unless you shop around, says Karl Brauer, senior analyst for Edmunds.com, a consumer website for auto buyers. "Even if you ultimately end up using dealer financing, it's never good to go in and not know your alternatives," he says.
If you're planning to buy a car and can't afford to pay cash, here's what you should do to prepare.
Know your credit score
Your credit score will determine whether you qualify for the lowest rates from a dealer or outside lender. You can get a general idea of your credit profile for free at websites such as Creditkarma.com, Quizzle.com or Credit.com.
You'll have to pay to get your FICO score, the proprietary score most lenders use. You can buy a standard score from TransUnion or Equifax for $15.95 from myfico.com.
Get quotes from other lenders
Talk to several banks to find out what kind of rates they're offering for car loans. If you belong to a credit union, check its rates, too. Most financial institutions will prequalify you for a loan even if you don't know exactly what car or truck you're going to buy, says Gail Hillebrand, senior attorney for Consumers Union.
Another option is MoneyAisle.com, an auction site that allows consumers to solicit bids from financial institutions for certificates of deposit, high-yield savings accounts and loans on new and used autos.
To solicit bids for auto loans, plug in your ZIP code and the make and model of the car you want to buy. If you see a bid you like, you can contact the bank or credit union. A test-drive of the site generated bids ranging from 3.89 percent to 5.12 percent for a five-year, $25,000 new-car loan, based on an excellent credit rating.
Once you've been prequalified for a loan, you can negotiate with the dealer, Brauer says. In many cases, he says, dealers will offer to beat the interest rate offered by your bank or credit union, or at least match it.
Scrutinize no-interest loans
Some dealers, eager to move cars off their lots, offer zero percent financing on certain models. But even then, you should explore other sources of financing, Brauer says.
Some dealers require you to pay off the loan in two years, which could result in larger monthly payments than you can afford, he says. Others require a sizable down payment.
Some dealers will offer a choice between zero-percent financing or a rebate. If you can get a good rate from a bank or credit union, you may be better off taking the rebate and arranging your own financing, Brauer says.
Edmunds.com offers a calculator you can use to compare the savings from a rebate against a low- or no-interest loan. Click on "Low APR vs. Cash Back."
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