Tips for Negotiating Auto Loan Terms
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One of the side effects of the pandemic is that supply chain issues and increased demand for different goods have had an outsized impact on certain markets. This is still evident in the automotive industry, where used cars continue to stay expensive, even as auto dealers have a better supply now than they did during the height of the coronavirus pandemic.
Dealers have a reputation for trying to make money off of everyday consumers, but if you go into your negotiations with the right mindset, you may be able to save money in the long run. Especially if you’re able to negotiate or shop around when it comes to your auto loan, you can save a lot of money throughout the life of your vehicle. This is particularly important when interest rates are still relatively high.
It can be stressful to try and negotiate any financial product; however, when it comes to buying a used or new car, putting in the leg work can really help your overall personal finances. Here are a few tips to keep in mind when negotiating your auto loan terms.
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What you need to know about auto loans
Before you take out an auto loan, you must understand a few key concepts about auto loans. With this information, you can make a more informed decision and ultimately get a better deal. The two areas that are most important to focus on learning about are specific terms that relate to loans as well as the different types of auto loans you may be eligible for.
Important auto loan terms
If you don’t “speak the language” of loans, that’s okay — but there are a few concepts you should understand if you’re going to be successful in haggling with your car purchase.
For starters, you’ll want to understand a loan's annual percentage rate (or APR). This is a number that is generally represented as a percentage and stands for the annual cost associated with borrowing the money. Generally speaking, a lower APR is better since a lower APR will amount to lower bowering costs over the loan's lifetime.
The next thing you need to understand about auto loans is the down payment. A lot of times, auto dealers will ask you what you want to pay every month rather than even asking what you have to put toward the vehicle outside of your loan. Just like when borrowing money to have a mortgage, a down payment is an upfront payment that you apply to offset the total purchase price of the car. If a car costs $10,000 and you can get a loan for only $7,500 since you have $2,500 to put towards the car, that will ultimately result in lower monthly payments and less interest paid over the loan's lifetime.
One final aspect of auto loans you should understand before trying to negotiate your auto loan is what a loan term is. Simply put, the loan term is how many months or years you will repay your loan. It’s sometimes known as a repayment term, and while a longer loan term may result in overall lower payments, it may also result in higher interest paid over the duration of the loan. There’s a bit of a give-and-take to thinking about loan terms when it comes to auto financing. This is why it’s important to reflect on your own financial situation before purchasing a car.
Different types of financing
When it comes to getting financing for your car purchase, there are a few different types of financing you may want to look into. From dealership financing to bank loans, credit union loans, online lenders, and special financing, here’s what you need to know.
Dealership financing
This is financing that is handled in-house and is an auto loan that the car dealership gives you, acting as the lender to offer you the loan directly. This is a particularly convenient way to finance your car purchase, since it streamlines everything to one place and is generally useful for buyers with a wide range of credit scores, including lower credit ratings.
While there are benefits to using dealership financing, these terms may be less flexible to negotiate. Additionally, they may come with higher interest rates than other options, unless you come prepared with a good rate that you task the dealer with beating.
Bank loans
Your bank is another option when it comes to getting financing for your car purchase. This could be from a national branch or a local bank, and everything is handled by the bank. If you have a good credit score, you will generally get competitive interest rates when working with your bank. You may even be able to get a relationship discount if you’ve banked with the institution for a long time.
While there are definitely perks to getting an auto loan from your bank, they may have stricter credit requirements than other lenders. Additionally, they generally are less flexible than credit unions (although they may offer more flexibility than a dealership).
Credit unions
A credit union is a non profit financial institution owned by its members, often with a community approach to their lending and other financial activities. As a result, they can be more favorable when it comes to working with borrowers with lower credit along with offering lower interest rates and more flexibility with their loan terms. The only real drawback to using a credit union is that you need to be a member of the credit union in order to qualify to apply for a loan.
Online lenders
If you’re looking for a quick and easy auto loan application, working with online lenders through their digital platforms can be a great options. Especially if you have good credit, you can usually qualify for solid interest rates. It’s important to do your research before working with an online lender, since not all online lenders are as established. Doing some online research and checking out websites like the Better Business Bureau (BBB) can be a helpful way to mitigate some of these drawbacks, though.
Special financing
For borrowers with no credit history or bad credit, some dealerships may offer special financing or subprime loans. These types of financing options will generally have much higher borrowing costs because of higher interest rates and fees to compensate for the added risk the lender is taking on. If you must have a car and don’t have any other options, getting special financing isn’t the end of the world, but it’s important that you understand what you’re getting into before agreeing to the loan terms.
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How to prep for negotiations
Once you have a baseline for various lending options and loan jargon, it’s time to start preparing for negotiations. This step involves a bit of research and shouldn’t be skipped if you’re really trying to get the best deal out there. Here are a few tasks to consider as you prepare to negotiate your auto loan.
Take stock of your personal finances
As obvious as it sounds, if you don’t have a good benchmark of your personal finances, you could end up making a poor decision — even if you technically qualify for and receive competitive financing. Keep in mind that just because you can afford something doesn’t necessarily mean that you should make that purchase and tie up your finances in that way.
To start, take a look at your budget and see where you can make room for a new loan. In some cases, this might involve decelerating how quickly you’re saving for a vacation or home improvements. If that’s a trade-off you’re willing to make, it doesn’t hurt to have a trial run in your budget for a month or two seeing how you feel adjusting your finances that way. You’ll also want to check your credit report to get an idea for what types of interest rates you may qualify for.
Research the car you’re interested in
After you’ve assessed your current financial situation, you’ll want to take a look at the different sorts of cars that fit your budget. When it comes to taking a look at what the fair market value of the vehicle is, it’s best to use an independent website like Kelley Blue Book. This can help you understand whether or not a dealer is offering the vehicle you’re interested in for a fair price, and may also give you insight into how quickly a car depreciates.
While some people view cars as an asset, since they often depreciate so quickly, in my opinion it’s better to just consider a car as a necessity you pay for like any other utility. I know that technically a car isn’t a necessity if you live somewhere with good public transportation; however, trying to pick a car just based on how it may resell in ten years seems less important to me than finding a car that will be reliable for ten years and fits your budget.
Compare financing options online
Once you’ve explored a few different makes and models, you’ll want to explore financing options. Taking a look at various lending options from the list above can help you understand how to save the most money on your purchase. Additionally, getting a good rate from a bank or credit union is something you can leverage when you go to talk to a dealership.
By being pre-approved, you show the dealer that you’re serious about purchasing a car and also that you have options. This is key if you’re trying to get the best rate, because it shows that you’re pre-approved for a strong rate already with a competitor. When I bought out my lease, I got pre-approved for financing through a credit union where I worked and that letter of approval allowed me to save 1% on my interest rate just by going with the dealer’s financing.
Tips for successfully negotiating
Whether it’s a raise or a job offer, negotiating anything can be stressful. This can be especially true when dealing with car salespeople, since a car dealer is much more well-versed in sales and the car-buying process than you are. Even so, here are some tips that can help you do well when trying to get the best deal possible on your car loan.
Start with the price of the car
Getting the best price on an auto loan starts with getting the best price on the car itself. By doing your research and understanding the car’s value, you’ll be in a position to be able to haggle this key factor. Keep in mind that the price of the car involves a lot more than the sticker price, but start with discussing the price of the car itself before you even begin to broach the subject of financing.
One of the keys to success when it comes to getting a lower price is not accepting a purchase price that’s higher than you’re willing to pay. Of course, a salesperson is going to try and sway you with add-ons or other incentives, and some of these might be tempting. That being said, if you know that you don’t want to pay more than $8,900 on a used 2016 Fiat 500 Pop, then you shouldn’t pay more than that. Whether you’re using your pre-approved loan amount or your budget as a bargaining tactic, make sure you stick to your guns. Using your trade-in or any available rebates can also help you get a better deal on the sticker cost of a car.
Negotiate a lower interest rate
Once you’ve decided on a fair price for the car itself, it’s time to talk interest rates. Having compared lenders and knowing your credit score allows you to have a leg up in these conversations, since knowing the market rates will help you get the lowest possible APR you can qualify for. Getting the best interest rate and the best purchase price could help you save thousands of dollars over the lifetime of the loan.
In some situations, it may make sense to find a co-signer in order to get the best interest rate. This generally is more important if you have a poor credit score and aren’t getting great options from lenders when it comes to APR. While it can be helpful to have a co-signer, it’s a good idea to be clear about who is responsible for the loan if you do use a co-signer. Generally speaking, you should only co-sign if you are a parent or spouse of the person applying for the auto loan, and even then it’s something to think about seriously.
Negotiate loan term
After agreeing on an interest rate, you’ll want to talk about the length of the loan. It’s at this stage that having a larger down payment may be helpful to bring into the conversation. Keep in mind that you don’t want to discuss a down payment until this moment, since your dealer may view that as money in your budget you could have spent on a higher sticker price for the car.
Be wary of add-ons
Many times, salespeople will agree to a lower price in one area just to try and get you to pay more in a different one. Being prepared for these add-ons is the first line of defense when it comes to sticking to your negotiation plan. Extended warranties, gap coverage, and other additional services can sound like a great deal; however, by brushing up on your own auto insurance policy ahead of time, you’ll be able to know what’s worth it and what’s not.
Know when to compromise
Just like it’s important to know when to walk away, it’s equally as important to know when to compromise. If you’re inflexible and unopen to negotiation, it will be a hard task to find the right car at the right price. Sometimes, giving a little more wiggle room in one area is all it takes to get on the lender’s good side and ultimately get the best deal. While you don’t want to overpay for a car, you also want to leave the dealership with a car if you can.
Car loan mistakes to avoid
Here are some of the most common mistakes buyers make when getting an auto loan to finance their car purchase. If you retain nothing else from this article, commit these ideas to memory!
Overextending
Your budget is your budget for a reason. It’s easy to get enamored with a fancier model or a car with extra bells and whistles. While many of us could theoretically rearrange our budget to pay for a Mustang, overextending your budget is a surefire way to set yourself up for trouble.
Focusing on the monthly payment
Similar to overextending your budget, many people can get stuck on thinking about a car as a “monthly payment” instead of reflecting on the all-in cost. You may think that paying $250 a month for 60 months is a great deal for your car. However, when you consider that paying only a $100 more a month for 36 months results in total savings of $2,400 over the lifetime of the loan, you can see why it’s important to look at the bigger picture.
Not shopping around for loans
If you aren’t comparing lenders, you won’t get the best interest rate and loan terms. Do yourself a favor and take advantage of the fact that your credit will only take one hit from filing for pre-approval if you shop around lenders in the same week. It could be the thing that saves you thousands over time.
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- Takes minutes to see how much you can get
- Doesn't hurt your credit score to check
The bottom line
Buying a car often requires more costs than just the purchase price of the vehicle itself. From car insurance to maintenance and registration fees, you may be surprised by just how much you wind up paying to own a car. This is why it’s important to do everything in your power to negotiate the best possible price on a car loan if you want to keep your personal finances in check.
From doing your research on the fair market value of certain vehicles to coming prepared with knowledge of your own personal finances, every action you perform before visiting an auto dealer can help you get a good deal on your car. It’s just as important to stand firm in these facts once you start dealing with a car salesperson, since they are frequently masters at getting the upper hand.
If you’re reading this after making a car purchase and feel like you made a few mistakes, doin’t stress! Keep in mind that most lenders have no prepayment penalty, so you always have the option of paying down your vehicle faster than your loan terms in order to save money. You can even try and refinance your auto loan in order to get a better deal and lower your monthly payment. Ultimately, as long as you properly prepare and come willing to negotiate, you should be able to get a good deal on your car.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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