When people go car shopping, they usually focus on the vehicle they want — not the loan that will pay for it. But good financing is the bedrock of a solid car deal, and missteps could cost you thousands.
“Once you shake hands with the car salesman, you are not done,” says Oren Weintraub, president of Authority Auto in Tarzana, California. As a car-buying concierge, Weintraub identifies cars for clients and negotiates the deals. Getting the sales contract — and all the financing terms — right is so important, Weintraub insists on reviewing a faxed copy before his clients sign.
While consumers know that low interest rates are desirable, there are other critical factors to consider when securing a car loan or dealership financing. Car-buying experts and industry insiders recommend key strategies to prevent costly mistakes.
1. Avoid long loan terms
The average car loan term has stretched to an all-time high of 69.3 months, an increase of 6.8% from five years ago, according to Edmunds.com. But long terms can put borrowers at risk of becoming upside-down on their loan — meaning they’ll owe more than the car is worth — and paying more in interest over the life of the loan.
While you can get loans up to 84 months, Edmunds recommends financing a new car for no longer than 60 months. Used car loans shouldn’t be longer than 36 months.
2. Shop your best rate
If you don’t know your credit score and what interest rate you qualify for, how can you know you’re getting the best deal on financing? Applying to multiple auto lenders lets you compare offers to ensure you get the most competitive rate — either from an outside lender, like a bank, credit union or online lender, or from the dealer.
With dealership financing, those with excellent credit can assume they’ll qualify for the manufacturer’s best terms, Weintraub says. However, buyers with midtier credit are at risk of having a dealer mark up their interest rate.
To prevent this, “I always suggest that you apply for financing with your bank or credit union before you go car shopping,” says Michael Bradley, fleet internet manager at Selman Chevrolet in Orange, California. “Then let the dealer try to get you a better rate than you already have."
3. Don't focus only on monthly payments
Whether you choose an outside loan or dealership financing, it's natural to want to have a low monthly payment. But beyond the extra interest costs you might incur with a longer term, focusing solely on monthly payments can leave you vulnerable in other ways. Some salespeople at the dealership may ask what monthly payment you want and then covertly inflate the sales price.
“If you become a monthly payment buyer, you’ve lost control of the deal,” Weintraub says. You may overpay for the car, with the extra cost hidden in other areas, like extended warranties or extra insurance policies.
Instead, follow Bradley’s advice, and get preapproved financing. Then you can tell the salesperson you’re a “cash buyer” and negotiate only the total car price.
4. Watch out for surprise fees
Make sure you understand your lender’s fees. Banks, credit unions and online lenders may charge origination fees. These are often rolled into the total loan amount, so you can simply compare offers based on the payment and interest rate. Occasionally lenders may also charge prepayment fees. And loans through both outside lenders and dealerships often assess late fees.
At the dealership, some salespeople may quote a low sales price but then tack on additional fees (or pricey car accessories) to boost their profit. Weintraub advises asking the finance manager to explain any extra fees before signing your contract.
For reference, in most states, car buyers pay for the car, sales tax, a documentation fee and registration costs. Shoppers can compare dealerships by emailing to ask for a breakdown of fees before they agree to a deal, Bradley adds.
5. Review vital loan terms
Loan contracts are binding, so review the terms carefully. Whether you borrow online or at the dealer, it will be hard — or impossible — to “unwind” the deal. Before signing, review the interest rate, loan term, monthly payment and any fees.
When shopping outside auto loans, also be aware of any restrictions. Some lenders won’t finance certain car makes or models, or their offer may apply only at specific dealerships.
At the dealership, most sales contracts are boilerplate documents reviewed and approved by the state. But “if reading every word is important to you, ask for a blank one to read as you are waiting for the F&I [finance and insurance] manager to complete your paperwork.”
Instead of scrutinizing the verbiage, focus on the numbers in the sales contract, Weintraub says. If you’re properly prepared, there shouldn’t be any ugly surprises.