Interest rates: The interest rate you’ll get depends on your credit score and income, the length of the loan you choose, the type of car you buy and whether it’s new or used.
Loan terms: Some lenders offer loans for up to 84 months. However, it’s best to pay off a car loan quickly since cars depreciate rapidly. Owing more on the loan than the car is worth is called being “underwater” or “upside down,” which is a risky financial situation. Also, the best interest rates are available for shorter loan terms. NerdWallet recommends 60 months for new cars and 36 months for used cars.
Rate shopping: Applying to several lenders helps you find the most competitive interest rate. However, it can lead to your being contacted by multiple lenders or dealers, especially if you use a service that compares offers for you (such as myAutoloan). If you’re worried about getting overwhelmed by calls and emails, create a new email account and get a free Google Voice phone number that you can check separately. Also check the loan terms that your bank or credit union offers. Their rates can be competitive with those of online lenders.
“Soft” vs. “hard” credit pull: Some lenders do a “soft pull” of your credit to pre-qualify you for a loan. This doesn’t damage your credit score, but it also doesn’t guarantee you’ll be approved for a loan or get the exact rate you’re quoted. Other providers run a full credit check, which temporarily lowers your credit score by a few points. But again, your final rate could differ slightly from your preapproval quote. A hard pull will be required in all cases before a loan is finalized.
Restrictions: Some lenders only work with a network of dealerships. Others won’t lend money to buy cars from private sellers. Lenders may also exclude some makes of cars, certain models and types of vehicles, such as electric cars.
Funding: Once the loan is finalized, the lender will offer you a loan with a maximum amount at a stated interest rate. Lenders provide the money in a variety of ways: a no-obligation check, direct deposit to your bank account or a certificate to be used at a car dealership.
Why preapproval is important
Preapproval streamlines the negotiation process because you can sidestep the car salesman’s favorite tactic: the monthly payment game. If you negotiate based on a monthly payment, it’s easy to lose sight of the real price of the car. But when you’re preapproved, you become a “cash buyer.” That means you can concentrate on negotiating only the price when shopping for a new car.
Negotiate the best deal for the car, and leave enough money to cover taxes and fees. For example, if you’re approved for up to $20,000, look for a car in the $15,000 range because the final price will be about $16,500 or higher.
At a dealership the finance manager may try to beat the interest rate of your preapproved loan. If the interest rate is lower, and all other terms are the same, take the loan. But look at the contract carefully before signing, because there is a risk the finance manager could juggle the numbers in the dealership’s favor