Roughly 26% of car buyers feel that they overpaid for their vehicle, according to a 2014 survey from TrueCar, Inc. That same survey admittedly also found consumers believe car dealers make about five times more profit on the sale of a new car than they actually do — but whether you truly paid too much for your now-old ride or you simply think you did, there are ways to save the next time you hit up a car dealership. For starters, the rates on auto loans are largely driven by your credit, so simply bolstering your credit score can potentially save you thousands of dollars over the life of your loan. Plus, it never hurts to comparison shop and negotiate when it comes to auto loans and the actual vehicle itself — you may be missing out on savings by doing one and not the other.
But First… How Much Car Can You Afford?
According to Credit.com contributor and car insurance comparison company TheZebra, automotive experts generally suggest auto loans not exceed 10% (if it’s just the loan) to 20% (if it’s the loan and related expenses like car insurance) of your gross monthly income. Of course, that’s a broad rule and every potential car owner is going to have to take a long, hard long at their finances and current debt levels to decide what they can, in fact, afford. Following these three simple cost-cutting steps can help you save big on your auto loan and next car purchase.
1. Do a Credit Check
Not checking your credit before you start shopping for a car is a huge mistake. Because your auto loan rates are directly tied to your credit scores, even a small inaccuracy on your credit report could cost you. Before you start shopping for your dream car, take an hour to check all three of your credit reports and credit scores online. You need to check with all three major credit reporting agencies — Equifax, Experian and TransUnion — because you don’t know which one a lender will use for your application. If you have a credit score above 750, you can probably qualify for the best rates available and negotiate an excellent deal on your car. If your credit score is lower, see if you can give it a boost before you apply for a loan.
You can view two of your credit scores, along with your free credit report snapshot on Credit.com. The snapshot will pinpoint what your specific area of opportunities are and what steps you can take to improve. However, as a general rule of thumb, you can raise your credit score by disputing errors on your credit report, paying down high credit card debts and limiting new credit applications.
2. Shop Online
Unless you have a credit score in the 800s and can qualify for a 0% auto loan offer, you are probably not going to get the best deal on a loan from the dealership. Auto loan rates and fees offered by online auto lenders are usually a lot lower than the rates offered by dealership financing programs. Plus, you can shop and compare rates online without causing damaging inquiries to your credit report (provided you’re not formally applying for every offer you see). Most online lenders have calculators or rate guides that show you what rate you could receive based upon your credit score. (Note: Be sure to vet any lender, whether online or within a dealership, before taking them up on an offer.)
With many online loans, you fill out the application and receive an approval by email within a few hours. Then the lender mails you a check that is ready to be made out to the person or business selling the car. If you end up not buying a car or not using the loan, you toss the check (shredding it first, of course). Plus, the check from the lender usually specifies a certain price range (for example, $9,000-$10,000). This leaves you with some room for negotiating a lower price with the seller even after you have received your loan approval. Speaking of which …
3. Negotiate the Price
Many people may wind up overpaying for a car simply to avoid negotiating the price of a car with a salesperson. Luckily, the Internet makes negotiating with car dealers a whole lot easier. Before you start shopping, look up the listed price, invoice and MSRP of the car you want through an unbiased site like Kelley Blue Book and request free price quotes online. Armed with these facts, you’ll have an advantage over the salesperson when you start the negotiations. You should be able to save a couple hundred dollars, if not a few thousands, by negotiating with the car salesperson before you decide to buy.
You may be thinking: This is all fine and dandy, but does it really add up to $3,000 in savings? Let’s crunch the numbers using this auto loan calculator.
According to data from Experian, the average interest rate on a new car loan for prime customers as of the last quarter of 2015 was 3.55%. The average rates on a new car for non-prime customers and subprime customers during that timeframe were 6.24% and 10.36%, respectively.
So, let’s say you wanted to buy a $16,000 car and had $1,000 saved for a down payment. If you chose a loan repayment period of 60 months, had a non-prime credit score (think just below 700), and got a loan through a dealership, you could receive about a 6.3% annual percentage rate (APR).
- Dealership option: $292 a month – $17,525 total costs
However, if you checked your credit reports and scores before you applied and found a way to boost your score to prime (think around 750), your interest rate from the dealership could drop to about 3.5%.
- Improved score: $273 a month – $16,373 total costs
You would have already saved $1,152 dollars, just by checking your credit reports! That’s a pretty good return on your investment. Next, you might be able to reduce your rate even more by shopping for a loan online with your new credit score of 750. Let’s suppose, for argument sake, you qualify for a 2.7% APR (the average interest rate for super-prime customers during the last quarter of 2015, according to Experian).
- Online loan: $268 a month – $16,052 total costs
You would have saved almost $1,473 by working on your loan options using Step 1 and 2. Finally, if you went to negotiate with the salesperson you could probably make a deal with the seller to reduce the price of the car down to $14,000. In this case, you would only have to borrow $13,000 with your 2.7% APR loan from an online lender.
- Negotiated deal: $232 a month – $13,912 total costs
Your total savings from following these three simple steps would equal $3,613 over the life of your auto loan!