car financing deal coupleAre you shopping for a car? Whether you are buying a new or used car, there is a good chance that you will be financing the purchase.

Of course, if you can afford to comfortably pay with cash you should consider doing so. But if you don't have the luxury of buying a car with cash, be wary of what the dealer tells you when it comes to financing your purchase.

Car dealers are in the business of making money. This holds true not only for the price of the car, but also for the financing.

Car Financing Tips

Here are several little-known car financing tips that may help you secure a better deal:

1. You do not have to use the bank that the dealer suggests.
Many people walk into a dealership, choose a car, and let the finance department provide the loan. While this appears to make the process easier on the buyer, in the long run you never know for sure if you are getting the best deal. Dealers often have deals with specific banks, which is why they try to push you in a certain direction.

Before you head to the dealer, search for your own financing. For example, speak with the institution that you currently bank with about their auto financing options, compare loan rates online or visit a local credit union. By asking around, you can ensure that you are getting the best financing plan, with the lowest rates.

2. You do not have to use the manufacturer’s lending division.
Many people believe they are required to finance their car at the dealership. Unfortunately, some shady car salesmen and financing “professionals” tell customers that this is a requirement for financing the car.

For example, several years ago I purchased a Honda Accord. Even though the finance department representative said I could use my own lender, he strongly suggested that I go through Honda Financial Services. After comparing my options I found that Honda offered a loan with a 7% interest rate while my local bank offered the same loan at 5%. The decision to go with my local bank was easy.

If a dealer tells you that you are required to use the manufacturer’s bank to finance your car, he or she is lying. It is time to move on to a more honest seller.

3. You can negotiate the rate.
Did you know that car dealers have the ability to “mark up” the interest rate that you are charged on your loan? The difference between the rate offered by the lender and the rate you agree to, if higher, is given back to the dealer.

While this is a way for the dealer to make money on unsuspecting consumers, it is also a way for you to save money. You just spent a lot of time negotiating the price of your car. You might as well continue the negotiating at the financing table. Even if you shave only one percentage point off your loan, negotiating will save you hundreds of dollars (or more) over the life of the loan.

4. Who said you need a down payment? When buying a home, you almost always need a down payment. This is especially true in today’s day and age. Fortunately, the same does not hold true when buying a car. If you don’t have money for a down payment, you can still buy a car. Although this will mean a higher monthly payment, you still have the ability to make a purchase.

Note: Some lenders do require a down payment. If you don’t have the money, shop around until you find a lender that will give you a loan with nothing down, but be sure that you will have no problem making the necessary payments.

5. You don't have to buy, or finance, an extended warranty.
Financing an extended warranty isn't financially responsible, since you will pay interest in addition to the cost of the warranty. However, it can be a good way to get extra coverage without having to spend a lot of upfront money. Make sure that you know the total cost for the extended warranty, plus interest charges, before you purchase this optional coverage. In addition, verify what coverages are included with the manufacturer's warranty before purchasing an extended warranty from a dealership.

When I bought my last car I also purchased an extended warranty. The dealer offered this at a total cost of $1k. I had two options: pay it all upfront or lump it in with my loan. I decided on the latter. Yes, this means that my payment went up by roughly $15/month, but it was better than paying in full at the time of purchase or not having the coverage at all.

Final Word

It is easy to get duped when financing a vehicle purchase. After all, you are excited about the car you are buying and you just put a lot of time into negotiating the price. Although you may think the negotiating has ended by the time you reach the financing department, make sure you follow the five tips above to get the best deal on your car.

These tips can help you secure better financing for your vehicle. Do you have additional tips to share? Tell us how your favorite negotiating tactics worked for you when you purchased your last car.

1 comments

  1. Jill // June 17, 2011 at 1:29 AM  

    I would add that you can also negotiate your extended warranty. We got ours for $0.70. They have a really and I mean really big book with a lot of numbers in it. Make them pull it out! I think it helped that we had good credit. We also brought in our own financing with a credit union b/c the interest rate was better.