At times, it may seem that negotiating the best deal on your auto loan can be confusing and frustrating, but it doesn’t have to be this way. When it comes to purchasing your next car, having a little bit of research on your side may just do the trick.
One of the most confusing parts of purchasing a new vehicle is financing. Littered with jargon and inside speak, auto loans and purchasing prices can be complicated to understand. Knowing how to navigate all of the ‘auto speak’ may be the bit of knowledge you need to negotiate the best deal on your next vehicle.
APR is short for annual percentage rate. This is the interest rate you will be charged for your auto payment each month, and varies based on your credit worthiness, amount borrowed and the loan you are applying for. This rate is negotiable, and smart buyers should take the time to review all their lender options in order to walk away with the lowest deal.
DMV & Dealership Fees
DMV fees reflect the amount of money you need to license and register your car with the state. Newer cars tend to have more expensive DMV fees than older or used vehicles. DMV fees vary by state, so it is important to check with your local DMV to help budget your new vehicle.
Dealership fees are extra add-ons that auto dealers use to help them recoup some additional profit on your purchase. Vehicle or dealer preparation fees, documentation fees and dealer-installed accessory fees are all add-on charges the dealer adds after the agree purchasing price. Many of these items are negotiable, so read the fine print and do some research before signing the dotted line on your next vehicle.
One of the best strategies to help reduce your monthly payment or APR is placing a down payment on your new vehicle. A down payment is the cash you pay onset during your purchase, representing a percentage of the full purchase price while the rest is paid through auto loans or other financing arrangements. While the down payment is not a part of your loan, it does show lenders that you are a low risk.
Some car buyers will use their existing vehicle as a trade-in for their down payment, while others use their car and cash to help secure lower auto loan rates. Before determining how much you want to make as a down payment, take a trip to your community credit union to review your finances and understand how much you can afford to spend on your new car.
FICO Credit Score
A FICO Credit Score, or Beacon Score, is a number generated by the three core credit bureaus to rank your credit-worthiness through a complex algorithm that pulls in your payment history, credit utilization, length of credit history, new credit and credit mix. Your credit score will have a significant impact on your monthly car payment. Your credit worthiness shows lenders you are someone they can trust to repay your loan on time and in full. Carefully managing your credit score will keep your interest rates as low as possible, while any blemishes on your report may subject you to higher APRs and more obstacles while securing a new or used car loan.
If you’re unsure about where you fall on the credit score scale, the Fair and Accurate Credit Transactions Act entitles every American to one free credit report per year. Take some time to meet with a trusted credit union representative to review your report, clearing up any bumps and blemishes you find along the way at least two months before you plan to purchase a new vehicle.
When you start looking for your auto loan, don’t be surprised if your credit score is a little different than the one on your credit report. This is because most auto lenders use a different variety of FICO score, known as the FICO Auto Industry Option. This type of FICO score takes your Beacon score, and combines it with attributes related to your auto loan risks to create a new score based solely on your auto financing history.
Invoice price, or dealer cost, is the price that appears on an invoice when an auto dealership purchases a specific make and model from the manufacturer. The price listed is almost always higher than the real cost a dealership pays, however, thanks to dealer holdbacks and incentives.
An invoice price can provide you with a baseline for your negotiations, providing you with a glimpse into understanding the true dealership cost for any car on the lot.
Another important element of any new or used car loan is the term length. Since 2002, term lengths have been on the rise, with the majority falling between six and seven years in length. While the lower monthly payment on these loans may be appealing to some purchasers, the smart buying decision is to pay attention to the bigger picture.
The longer you finance a car, the more interest and final cost you will pay. There is little to no value is any loan longer than six years in length, and most auto experts suggest aiming for a term length of 60 months or less.
Your existing vehicle’s trade-in value is the value a car dealership will give you towards the purchase of a new purchase. Consider trading in your existing vehicle to the dealership to help lower your purchasing cost on a new car. While trading in your car can bring its share of advantages when financing your new vehicle, it is important to remember you will usually get less money than if you just sold the vehicle on your own.
Trade-in values vary from dealership to dealership, but having the Kelley Blue Book, Edmunds or another estimate as well as online quotes from other dealerships can be valuable bargaining chips when negotiating your trade-in value.
What happens when you put more money into your car than it’s worth? This is known as being upside down on your car loan, or owing more on your auto loan than what your car is actually worth. This is the first sign that you may be on the way towards some serious financial problems. If you find yourself in this situation, take the time to consider your options and weigh both the pros and cons before making any decision.