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Auto Financing

Shopping for loans and trying to get the best rates and other terms, while complicated, is like other types of comparison shopping. Shopping ahead of time will get you ready to negotiate your auto loan and make the process less stressful. It will put you in a better bargaining position and could save you hundreds or even thousands of dollars over the life of your loan.

You will be in a better position to shop and bargain for an auto loan if you follow these steps before applying for a loan.

Check your credit report

The information in your credit report determines your credit score, which plays a large part in determining what kind of auto loan you can get and how much interest you will pay for the loan. To get a free copy of your credit report, visit annualcreditreport.com. To learn how to read your report and check for and dispute any errors visit consumerfinance.gov.

Research current interest rates

You can find auto loan interest rates by contacting several banks, credit unions, or other lenders. You can also look online at many commercial sites, which may give you an estimate of interest rates nationwide and by your zip code. Some commercial sites will link you to specific lenders and dealers for estimates, so you may want to be careful about entering your personal information.

Consider a down payment

A down payment will reduce the total amount that you finance because you will have to borrow less money. The larger the down payment, the lower the total cost of the loan.

Decide if you want to trade in your current vehicle

If you already own a vehicle, research its value to see how much you might get from a trade-in or private sale. You can look up the approximate value using online commercial websites such as Consumer Reports, Edmunds, Kelley Blue Book, NADA Guides, and online classifieds. 

Once you know approximately how much your current vehicle is worth, you can decide whether to trade it in or sell it yourself. If you trade it in at a dealership, you and the dealer will decide on the value credited towards the purchase price of your next vehicle. If you sell it yourself, you can use the money you get as a down payment.


Get Pre-approved

You can obtain a quote or pre-approval on an auto loan from a bank, credit union, or another lender before selecting a vehicle. The pre-approval will give you a loan quote with an interest rate, loan length, and maximum loan amount based on your creditworthiness, the terms of the loan, and the type of vehicle you have in mind.

Arranging for financing ahead of time gives you massive bargaining power when shopping for your car. Pre-approval also helps you stay within your budget and allows you to compare interest rates without the time pressure you may feel once you are at the dealership. Then at the dealership, you can focus more on the vehicle's actual price and your trade-in because you will already know about the loan terms that you could get. You will still have the choice to negotiate a better loan at the dealership and not use your pre-approval.

If your application is pre-approved, the lender will give you documents to take to the dealership. Once you are ready to buy, the dealer will make the final arrangements with your lender.


Understand how shopping for a loan impacts your credit score

Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Depending on the credit scoring model used, generally, any requests or inquiries by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry. This means shopping around for an auto loan during that time span will count the same as applying for just one loan. You can minimize any negative impact on your credit score by doing all your rate shopping in a short amount of time.

Carefully consider whether to take on new debt in addition to your existing debt.

If you have an existing auto loan on your trade-in, consider your situation carefully. Here are some considerations and steps:

  • Get the payoff amount, which is the amount to pay off the existing loan, from your current lender before going to the dealership.

  • Decide if you will pay off your existing loan now, wait until you pay off your old auto loan before you borrow for another vehicle, or include the amount that you still owe on your current vehicle in your new auto loan.

  • If you owe more on your current vehicle than it is worth — referred to as being upside down — then you have negative equity. If you roll the balance of your existing auto loan into your new auto loan, this could make the new auto loan much more expensive. Your total loan cost will be higher because you will be borrowing more than just the price of your new vehicle. 

  • After you research your trade-in’s value, if the amount you still owe on your trade-in is less than it is worth, make sure during any negotiations that you consider whether you are getting fair value for your trade-in and you can fully pay off the old auto loan.


Additional Learning Resources

Best Life Interactive

This short, interactive learning course from USSFCU reviews the steps, options, and resources involved in the auto financing process. LEARN >>

Take Control of Your Auto Loan

A step-by-step guide on automobile financing from the Consumer Financial Protection Bureau. READ >>

The Benefits of Pre-approval

Here are five reasons to line up a loan before visiting a car dealer. READ >>

The content on this page provides general consumer information. It is not legal advice or regulatory guidance. We do not endorse or guarantee the accuracy of third-party information.

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