Consumer Comeback Blog

How to Avoid Getting Ripped Off on Your Auto Loan

Written by Jeffrey Trull

new-car-financingBuying a car can be an exciting yet sometimes frustrating experience. With the back-and-forth of negotiation, checking every detail before signing an agreement, and understanding your financing package so as not to get ripped off, you’re likely to feel a little overwhelmed with the car buying process.

Luckily, saving money and avoiding rip-offs on your auto loan doesn’t require you to be a financing expert. Here’s some simple information you should know before walking into the dealership.

Check Rates Other Than at the Dealer

Obtaining financing through a dealership is usually the easiest and fastest option, but it’s not always the best deal. If you’re hoping to find the lowest interest rate, shop around beforehand.

Research has shown that going to a bank or credit union is often better than going straight to the dealer. For some banks, it might not even be necessary to visit a physical branch itself as online options for applying for an auto loan are now available.

Even if you still hope to get financing through a dealer, do your research ahead of time to get an idea of what rates are available. Going in blind means you’ll have nothing to compare to.

In addition to potentially lower interest rates, if you’re pre-approved for a loan from your bank, you may be in a better position to make your purchase. Not only will you be more able to negotiate the price of the car without worrying about financing terms, but you’ll have more flexibility rather than being limited by the financing offered at the dealership.

Be Prepared With Research

When applying for financing, your credit score will be checked. But that doesn’t mean you shouldn’t check it for yourself ahead of time. This will save time and hassle at the dealership since you’ll know if you have an excellent score or a poor one beforehand. Scores range from 300 to 850, and scores over 740 are generally considered excellent for auto loans. Below 640 might put you in the “sub-prime” loan category.

Prime interest rates fluctuate over time and the rate you’ll receive depends on the length of the loan and the car you are purchasing along with your credit score. You will typically need an excellent score to be approved for a loans at published rates, so most car buyers should expect to pay more. For example, Wells Fargo expects to provide the advertised rate to only 15% of customers with excellent credit.

If you’re looking at your credit scores months ahead of when you’re financing a car, there may still be ways you can improve your credit score. For starters, paying bills on time and lowering balances owed almost always helps. Also, make sure to read over your credit report to ensure that there aren’t any errors.

Compare Total Costs of Interest Versus Rebates

If you have the options between choosing a deal on interest, like 0% APR, and a rebate on your car purchase, make sure to find out which is actually a better deal.

General rule of thumb is that you should choose the 0% financing if you’re planning to keep the car longer. If you’ll only have the car for a 2-3 years, you might want to consider taking the rebate instead.

Not sure how to calculate it yourself? Use an incentives calculator to compare which is more valuable in your case.

Never Negotiate on Monthly Payment Amount

A trap that some inexperienced car-buyers fall into is shopping for a car based on the monthly payment they can afford. Of course, you’ll eventually need to arrive at a payment amount that’s right for you, but giving a car salesperson a target gives him the opportunity to make more money off the deal.

One trick to getting lower monthly payments is to simply extend the term of the loan. This will typically cost you more money in the long run, and allows the dealer to sell you a more expensive car.

Instead, always start negotiations based on the price of the car. Once you’ve agreed on price, move on to locking in the financing terms.

Watch the Terms Carefully

Tricky terms in your loan might end up costing you more if you don’t watch out.

To save the most money on your loan, you’ll at least want to keep the option open to pay your loan back early and save as much interest as possible. To do this, you should look for a loan that uses simple interest to calculate payments based on the current outstanding balance. Loans that use the Rule of 78 pre-computed auto loans offer less of a break when loans are prepaid and should be avoided whenever possible.

Car loan terms typically range from 36 to 60 months. Usually the shorter loan term means higher monthly payments but you’ll pay less interest over the life of the loan and save extra cash.

If you’re unfamiliar with the financing terms associated with your agreement, take a look at the auto financing guide published by the Federal Trade Commission. You’ll also find information on applicable laws and a checklist of things to remember before, during, and after your visit to the dealership.