by: Christina Uss
If you’re in the market for a new car, you’ll probably put
in some serious research time to hunt down the best price. But if you’re
planning to finance the car purchase, you’ve only done half your homework.
The average new-car loan runs over five years, according a
2004 survey by Power Information Network. Younger buyers tend to opt for longer
loan terms – up to seven years – so locking in the lowest-possible interest
rate will make a big difference in how much you’ll pay for those new wheels in
the long run.
Dealer Financing
About half of vehicle buyers go straight to the dealer to
arrange their financing. Kerry Rivera with Toyota Financial Services (TFS)
points out that a big selling point here is one-stop shopping convenience.
"By going to the dealership for financing, the customer
can take care of everything in one place…you pick out the car, visit the
finance office, who in turn will shop your credit around and find you a
lender," says Rivera.
Customers can also take advantage of the additional products
offered at dealerships, such as extended warranties.
Some dealerships have also begun to offer online credit
applications, which allow consumers to get a credit pre-approval certificate
before going to the dealer. Scion Solutions, TFS’ financing for Scion
customers, even posts your pre-approval rate online.
"With Scion, there is no need to negotiate," says
Rivera. "If you know your credit score, you can immediately know your
rate, too. The dealer does not add on any participation points for putting
together the deal. The process for Scion is something no one else is doing in
the industry."
Banks/Credit Unions
Banks and credit unions, another popular option for
financing, have been offering pre-approved car loans for years. Consumers who
obtain a loan from their bank before they get to the dealership will know
exactly how much they are qualified to borrow and at what rate – this way, no
high-pressure sales tactics can push them towards a car that they can’t afford.
Tim Campbell, a teacher in Fort Collins, Colo., is most
comfortable applying for loans at his credit union, where he has financed three
cars.
"I choose the credit union over the dealerships because
I like the comfort of having all of my banking in one place," he says.
"My paycheck gets directly deposited and I can make all my payments
online."
Campbell feels the credit union offers competitive rates for
used cars, but admits he would check out dealership offers (sometimes as low as
0%) if he were buying a new car.
Online Lenders
Online financial corporations such as Capital One or E-Loan
are the newest option for auto loans. Savvy Internet users can apply for loans
online without ever having to leave home and talk to a lender. By searching
online for a loan, shoppers can also do some serious comparison shopping on
sites such as Bankrate.com, which compares national and local auto loan rates.
Also, you can acquire a good bargaining chip by learning
exactly what rate you ought to qualify for. First, get your credit score
(eloan.com offers it free to first-time users), then go to the calculators at MyFico.com
to find out what rate you should be offered for a car loan. Armed with this
information, you’ll be able to negotiate more effectively for financing.
Parent(s)
Finally, you might consider the old standby: asking the
parents for a loan. You could pay very little interest, plus mom and dad can
make a few dollars while helping you out. Sounds like a win-win situation,
right? However, Susan Newman, Ph.D., social psychologist and author of
"Nobody’s Baby Now: Reinventing Your Adult Relationship with Your Mother
and Father," advises caution.
"You’ll want to weigh what strings could be
attached," she says. You’ll know that from past history with them. Every
time they’ve given you a large gift, did it mean you had to show up religiously
on Sunday night for dinner? Did they remind you every time they saw you what a
huge favor they had done for you?"
But Dr. Newman believes asking for a loan can be a positive
experience when treated as a serious business arrangement. "A car loan
from a parent gives you the opportunity to show them you are responsible…You’ll
go up notches in their pride meter and you’ll find them treating you more like
the independent adult you are…or hope to be," she says.
Before you sign your name on that next car loan’s dotted
line, make sure you’ve done your homework and checked out all your financing
options. The more you know, the better interest rate you’re likely to get.