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Auto financing: Five keys to the best loan rate

Consumer Reports

Don't let a good price on a vehicle be offset by a higher-than-necessary interest rate.

Auto loans are relatively easy to get. First, lending institutions know they'll get their money back because the loan is backed by the collateral of the vehicle. If you don't make the payments, the lender will repossess the car. Second, dealers will bend over backwards to sell you a car, and getting you financed is not only part of the process, it's also a huge source of extra profit. Because it's easy to get, an auto loan is also a good way for a young person to establish credit.

The trick is to get a loan for the lowest interest rate you can. The auto experts at Consumer Reports offer these five keys to getting the best loan rate:

1. Shop around before you visit the dealership.

Compare interest rates at various financial institutions, such as banks, thrifts, and credit unions, as well as the dealership. It's often an advantage to be preapproved for a loan so that you can keep the financial arrangements out of the vehicle-price negotiations at the dealership. The figure to focus on is the annual percentage rate (APR), which can vary from day to day. You can get a quick read on the prevailing rates at such online sites as Bank Rate Monitor (www.bankrate.com), E-Loan (www.eloan.com), Lending Tree (www.lendingtree.com), and Household Auto (www.householdauto.com).

2. Keep an eye on the total cost of the loan.

The term (duration) of a loan determines your monthly payment and the total purchase price of the vehicle. A shorter term for a loan means higher monthly payments but less money paid overall. Try to keep the length of the loan as short as possible. A three-year loan costs you far less overall than a four- or five-year loan at the same interest rate. For instance, if you borrow $20,000 at 7.5 percent APR for 36 months, your monthly payment will be $622 and the total interest you will pay over the life of the loan will be $2,396. If you finance the same amount at the same interest rate for 60 months, your monthly payment would be only $401, but you'd end up paying a total of $4,046 in interest. You need to balance the total cost of the loan against a monthly payment you can afford. The online sites mentioned above have calculators that can help you determine these figures before you sign on the dotted line.

3. Don't be lured into buying a car just because of a low interest rate.

Auto manufacturers often provide low interest rates in order to push slow-selling models. During the last year, for instance, a number of automakers have provided 0% and other very low rates. Such deals can save you money, but go in with a healthy skepticism. Sometimes, the dealer will refuse to budge from the manufacturer's suggested retail price in a 0% deal, sticking you with a higher-priced car. Low-interest rates are also no bargain if they persuade you to buy a car that you're not happy with. It may make better financial sense over the long term, for instance, to buy a consistently reliable model at a little higher interest than an unreliable model at 0%. Likewise, saving a few dollars each month on your payments may not seem worthwhile over the long run if you don't like the vehicle's performance, comfort, or other details.

Often, buyers have a choice between low-interest financing and a rebate. To see which saves you more money, use our 0% financing-vs.-rebate calculator, available free on ConsumerReports.org.

4. Remember, your credit record affects your interest rate.

If in doubt, check your credit score before you start looking for a loan. Having a sterling credit score can get you a better interest rate than having a poor score. The 0% rates, for instance, are typically available only to buyers with good credit scores. You can check your credit record online at Experian (www.experian.com), Trans Union (www.transunion.com), or My Credit (www.mycreditfile.com). If there are errors, it's advisable to fix them before you apply for a loan. Many lenders and dealers will work with buyers who are considered credit risks, but such loans have a much higher interest rate. Cleaning up any credit problems before you buy should pay off with a lower interest rate.

5. Keep financing discussions separate from vehicle-price negotiations.

If you plan to finance your car through the dealership, nail down the price for the vehicle before you bring up the loan. Many salespeople like to mix the vehicle price and loan together as one negotiation, often by focusing on the monthly payment figure. Don't be drawn into doing this. The tactic gives a salesperson more latitude to give you a favorable figure in one area while inflating a figure in another area.




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