Buying a new car is an important decision, and if you’re a savvy auto buyer, you know that getting a good deal involves more than snagging a great price. To calculate affordability and monthly payments, you need to factor in your interest rate.
Banks charge interest on just about every type of auto loan; to get the lowest rate, you might have to speak with different finance departments and request quotes. This is a smart move, as your interest rate determines how much you spend over the life of the loan.
But while you undoubtedly know the benefits of a low rate, there might be a few things that you don’t know about finding a car loan.
1. Zero-Percent Financing Isn’t Always the Cheapest Option
If you’re applying for a new car loan with excellent credit, you might qualify for zero percent interest. Who wouldn’t jump at the opportunity to purchase a car with zero-percent financing?
But don’t get excited too fast. In addition to offering zero-percent financing on new cars, some manufacturers offer factory rebates. And typically, you can only choose one or the other. Paying no interest might seem like the better offer, but if you skip zero-percent financing (and pay a competitive interest rate) and take the factory rebate, the savings you receive after subtracting the rebate from the sale price might be greater than the savings from zero-percent financing.
2. Zero Percent Might Come With Strings
Zero percent interest on a new car can be a terrific deal. But depending on where you go, there might be a few catches. Some places only offer these attractive new car rates on short-term leases or require a sizable down payment. And to compensate for any financial loss, the dealership might inflate the price of other costs, such as add ons or the extended warranty.
3. Used Cars Aren’t Necessarily Cheaper
Maybe you’re looking at used cars because you cannot afford the payment on a new car loan. However, there’s a little fact about new car interest rates: they’re often lower than used cars.
Of course, a lower rate on a new car doesn’t make up for the fact that you’re paying more for this car. Then again, if your credit score is high enough and you qualify for zero percent interest financing, the monthly payment on your new car might be the same (or lower) than a used car.
4. Going Short Can Save You Money
Do you stay away from new cars because they depreciate as much as 20 percent in the first year? This is understandable. Besides, no one wants to deal with an upside down car loan.
This concern, however, doesn’t have to stop you from buying the newest model of your favorite car. Not only are new car loan rates cheaper than used car loan rates, but short-term loans can bring you additional savings.
Let’s say you buy a new car with a purchase price of $15,000. With a 72-month term, you might pay a new car rate of 5.74%. Reduce your term to 60 months and the interest rate drops an entire percentage point — that’s nearly $40 a month in savings. Go with a three- or four-year term and the savings continue.
5. You Can Get Better Rates at Your Bank
Believe it or not, in 2011, car dealerships made an average of only $23 per every new car sold, according to the National Automobile Dealer’s Association. How do they stay in business? That’s simple — they make most of their profits by offering other services, such as auto financing.
So even if you qualify for a low-rate new car loan, don’t think that your dealership’s quote is the best you can do. The truth is, many dealerships pad the interest on car loans — by as much as one percentage point — to boost their profits. You’re better off securing your own financing at your bank. This cuts out the middleman and results in better new car interest rates.
Photo credit: Emilio Labrador