Estimated read time: 2-3 minutes
- Financial advisers stress the importance of shopping for car loans before visiting dealerships.
- A small interest rate difference can save thousands over a loan's life, experts say.
- Preapproved financing offers leverage against dealer rates but might forgo certain incentives.
SALT LAKE CITY — Financial advisers say car buyers often don't give their car loan much thought until they're face-to-face with the dealer's finance manager. In today's mix of higher interest rates and higher car prices, that can cost buyers thousands of dollars.
The average transaction price for a new car has passed the $50,000 mark, according to Kelley Blue Book. More than 1 in 5 buyers in the last quarter took out a seven-year car loan or longer, says Edmunds. And 7.9% of Utah borrowers have a thousand-dollar or higher car payment, finds LendingTree.
There are many reasons why people should shop for a car loan before stepping into a dealership, says LendingTree's chief consumer financial analyst, Matt Schulz.
"A fraction of a point can be a really significant savings," he said. "You're talking about potentially saving thousands of dollars over the life of that auto loan. It's a big deal."
Say you want to buy a $30,000 car. And for a 60-month loan with a $1,000 down payment, the dealership offers you a loan with a 7% interest rate. The total interest you'll pay for that loan is $5,454. But a bank down the street might qualify you at 5.5% interest. The total interest at that rate adds up $4,236. So, that additional 1.5% on the dealer's loan means another $1,218 in interest you'll have to pay.
Better terms and better leverage
Schulz says you're likely going to get better rates and terms from a small bank, credit union or online lender. And you can avoid the markup in rates dealers often throw in for putting together your loan.
"The truth is that if you don't shop around for rates when you're looking for things like a car or a mortgage, you're probably going to end up paying too much because there are significant differences among lenders when it comes to these rates," Schulz said.
The truth is that if you don't shop around for rates when you're looking for things like a car or a mortgage, you're probably going to end up paying too much.
–Matt Schulz, LendingTree
Schulz also says having financing pre-approved gives you crucial leverage in asking the dealer for a better rate than one quoted to you by a bank or credit union. At the very least, it allows you to skirt the finance manager's last push for unnecessary options.
"The more that you can go in prepared, knowing that you already have that financing and you can just let that sales pitch just roll off your back, the more comfortable you'll feel and the better the whole experience will be," said Schulz.
The other hand
But you should also know that skipping the dealer financing might not always save you the most money. You could miss out on incentives such as cash rebates, low or even zero-interest financing and special leases.
Either way, you could miss out on hundreds if not thousands of dollars in savings if you don't shop around for a car loan before setting foot into a dealership.
