Auto Financing Tips
Chances are, if you're planning to buy or lease a new car or truck, you're part of the increasing majority of consumers who do their homework well in advance of taking a test drive. Many consumers research pricing information, features and options, colors, specifications, safety and quality ratings. But if you're not paying cash for your vehicle, do you check interest rates, your credit score, and financing options with the same intensity? If not, you should.
In most cases, the dealership will work with you to explore financing options that fit your budget. But it's always a good idea to have a solid game plan on financing and understand your options before you set foot in a dealership. A recent study by J.D. Power and Associates shows that more consumers are obtaining financing from non-dealer sources such as banks, credit unions, and online lenders. Currently, more than one in five luxury vehicle buyers secure financing without assistance from the dealer. The auto loan financing market is becoming increasingly crowded. As banks, credit unions, and independent lenders become more active in automotive financing, manufacturer-sponsored financing programs offered by dealers will face pressure to become even more competitive.
The study also finds that leasing, which gained popularity in the 90's, is on the upswing again for the first time in five years. In 2005, 64% of all luxury vehicles were leased, up from 55% in 2004. Similarly, the lease rate for non-luxury vehicles was up 4% during the same period, from 18% to 22%. Leasing is becoming more popular, in part, due to rising interest rates. The average interest rate paid by luxury vehicle buyers increased from 3.9% in 2004 to 4.5% in 2005, and rates paid by non-luxury vehicle buyers increased from 4.2% in 2004 to 5% in 2005.
THREE KEYS TO SUCCESSFUL AUTO FINANCING
Key #1: Do Your Homework
Key #2: Stay Focused
- Evaluate your financial situation and determine how much you can afford to pay. Use our payment calculator to determine what fits your budget.
- Check out the Build a Vehicle and Compare Models features on this site to determine a realistic price range for the model you are considering.
- When doing your research, don't let price alone be the determining factor. Even though a particular model may fit your price range, it may not meet your needs.
- Understand the differences between buying and leasing.
- Get a copy of your credit report so you can correct any errors before you apply for financing.
- Compare interest rates and financing terms from multiple sources such as banks, finance companies, credit unions, and the dealership.
Key #3: Protect Your Credit
- Stay within the price range you can afford.
- Base your purchase decision on the vehicle and whether it meets your needs rather than shopping for the largest rebate or other financial incentive.
- Focus negotiations on the vehicle price not monthly payment. A few extra dollars in a monthly payment can add hundreds or thousands of dollars to the total amount paid over the life of the loan.
- Similar to price, financing terms are also negotiable. Negotiate your financing terms just as you would negotiate the price of the vehicle.
- Understand the value and cost of optional products such as extended service contracts, credit insurance, or guaranteed auto protection, and only buy them if you need them.
- Read the contract carefully before you sign it. Ask questions about anything you don't understand.
- Make your payments on time. Late or missed payments may result in late fees and will appear on your credit report, which can impact your ability to get credit in the future.
- If you financed the vehicle, be aware that the bank, finance company, or credit union that bought the financing contract from the dealership holds a lien on the auto title (and in most cases the actual title) until you have paid the contract in full.
- If you have difficulty making your monthly payments, talk to your creditors. Work out a repayment schedule and, if necessary, seek the services of a non-profit credit counseling agency. Don't wait until it's too late.