Shopping for a car is an exciting and research intensive process, but once you find that perfect model you’ll want to ensure you get the best possible loan to pay for your new ride.
New vs. Used
One big mistake people make when getting an auto loan is not really understanding the implications of getting a loan for a new vs. a used car. If you have excellent credit, you can generally get slightly better rates on a brand new car (~1-2%), but people forget that new cars depreciate 8%-12% the second they are driven off the lot. That means that, depending on your down payment, the loan you have on the new car will likely be larger than the value of the car. So if you want to sell the car, you’ll have to make up the difference in how much you owe to your sell price. And in the unfortunate scenario that the car gets totaled in an accident, your insurance may not even cover the full loan payoff.
The biggest mistake is not shopping around for rates to understand what is available; especially when going to a dealer to make a purchase. There are a lot of options for getting a great rate on a vehicle purchase, including a bank (both local and regional), a credit union (often times overlooked but generally with excellent rates) and at the dealership, and even a private-party loan. So be educated about your options, and follow our tips to protect your credit to shop for rates before making a decision.
Many people don’t know that rates on loans are often times negotiable, both at the banks/credit unions and at dealerships. This is especially true if you are not getting the best rate possible. All lenders have tiers of credit with corresponding rates. But it’s often possible to negotiate your rate down into a better credit tier or just to a better rate within the current tier. It never hurts to ask and could save you hundreds or thousands of dollars over the life of the loan.
A good rule of thumb is to always check with your local bank and credit union to see what rate they’ll offer before you finalize your purchase.