What is auto financing?
To begin with the basics, there are two fundamental types of auto financing: direct lending, and dealership financing. With direct lending, you approach a bank or credit union to borrow the money to fund your new purchase. Once your loan has been approved and received, you can put it towards a car. This may be beneficial in that you can shop around for the best loan for you before considering buying the car. It also means that you know your terms in advance. On the other hand, there is dealership financing, which refers to when you obtain money through the car dealership itself. This may be more convenient for consumers, with several different payment options available, but it does limit your choices somewhat by tying vehicle and loan together.
With global interest rates having been at an all-time low for nearly six years, you would think that now is the best time ever to finance a new car. Sadly, not every car loan company passes those savings on to the consumer – and some even charge interest rates that are greater even than if you were to buy a brand new car on a credit card! On the day of writing, average national auto loan rates work out to just over 2.7% for a used car, and just over 3% for a new car. Yet every dealership is full of traps for the unwary. This guide gives you the knowledge to help you get the best deal when financing your car, and save you money.
“On the day of writing, average national auto loan rates work out to just over 2.7% for a used car, and just over 3% for a new car.”
The Ones to Avoid
Regrettably, car financing offered by dealerships is usually the worst rate you can find. This is because the mark-ups allowed to dealerships by the auto manufacturers are incredibly low. And dealers want your business, so often they’re prepared to sell you a new car at a loss! How can they do this? The answer is that most dealerships make money not from the sale of cars, but from the sale of financing. Yes, that showroom full of shiny vehicles is just a marketing ploy – these guys may say they want you to feel good in your new car, but really they want your commitment to pay them high interest rates every month. And they’re very good at it! Here are some of their techniques:
1. They don’t talk about totals, they talk about what you can afford
This is an age-old technique to sell financing, but in the hothouse atmosphere of a car dealership it’s even more effective. They even have calculators that do it for them. They’ll ask you about your income, your rent or mortgage payments, your other outgoings. From this they’ll tell you what you can afford to pay them for your car every month. To do this they increase or decrease the amount of time it takes to pay the loan off – and paradoxically the lower the repayments, the more you’ll pay in the long run because they’ll extend your loan from five to ten years!
2. They know you’re too keen
You loving stroke the hood of that sedan, and fantasize about how cool you’re going to look cruising around in it. They watch you do it, and they play on it. Why bother going home disappointed when you can just sign their simple forms and drive out in that SUV with a sense of immense satisfaction. This makes you vulnerable!
3. They take up your time
A car is usually the second-largest purchase an individual will make in their life. Few people enter this kind of investment lightly, and the dealers know it. They want to get through as many customers as they can, but they also know that by making it a long and involved process, you’re less likely to be able to go somewhere else in the same weekend. So they’ll give you time to think about it (until it comes to signing on the line!) while rotating round other customers, just to make it more likely you’ll buy from them and not their competitor.