Sunday, 20 February 2011

3 ways to save money on a new car loan | Analysis

3 ways to save money on a new car loan
Feb 18, 2011 13:22 EST

auto | carbuying | family finances | loan

Car dealers don’t just make money on cars. They make money on extended warranties, undercoating, fancy floor mats, extra insurance and loans. They make a lot of money on loans, according to the consumerist Center for Responsible Lending, which reckons that dealers rack up hundreds of dollars in kickbacks for every loan they offer.

How much? According to a new calculator at the center’s website, if you’re financing a $26,000 car for five years and you have a decent credit score, the dealer is getting between $556 to $2,223 back from the lender. That’s because the dealer is essentially acting as a loan broker, according to Chris Kukla, the center’s senior counsel for government affairs. Dealers make the loans and then sell them to third party lenders. The sale price includes a markup that goes into the dealer’s pocket… not yours.

So, more homework for you, car buyer. The new car loan calculus is not pretty. Not only should you fully research the car you’re buying, you should also make sure you’re paying for it in the best possible way. Here’s how to do that.

Start with your credit score. Even if your dealer is advertising a zero percent loan, there’s a good chance you won’t qualify for it. Only the cleanest credit scores — those above 720 on a FICO scale — will qualify. The worse your score, the worse your loan deal.

For example, if you are looking at a five-year, $26,000 loan, you’ll pay an average rate of 4.95 percent or $490 a month, according to FICO. If your score is in the next lower tier; 690 to 719, you’ll pay 6.4 percent, or $508 a month. If your score is a middling 660, your rate would pop to 8.3 percent and your monthly payment to $531, costing you $2,473 over the life of the loan, FICO said.

If your credit score isn’t great, put off the car purchase while you either save money to pay all-cash, or bump up your score by paying down more credit card debt.

Comparison shop for the loan before you go look at the car. You can get quotes from several lenders at sites like AutoLoanDaily or Bankrate. CapitalOne Auto Finance, one bank that has gone into this space in a big way, is advertising 2.99 percent rates on new cars and 3.99 on used cars. (But will you qualify for that low rate? Refer back to the last tip.)

Check the rate offered through your local credit union, too. You can get qualified for the best deal you find and then go car shopping; Capital One (for example) will give you a check to buy the car. If the dealer beats that rate (without jacking up the price of the car to make up for it), you can rip up the check and go with the dealer loan. No harm, no foul.

Explore alternatives. You might get the best deal yet by using your home equity line of credit, where interest is typically deductible and lower than car loan rates. (Of course, that’s because it’s secured by your home, so don’t do this unless you’re confident you’ll make all the payments.

Finally, here’s one more crazy idea. All the money you save by nailing down the cheapest possible loan? Pretend that you got a more expensive loan and have to make a larger monthly payment than you actually do. Tuck that extra amount into a savings account for your next next car.



3 ways to save money on a new car loan | Analysis

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