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Should you opt for a car dealer's financing when purchasing a new car?
If you do, you'll likely be making higher car payments. They have financing lined up with a lender, but it's not always a good choice.
Imani purchased a 2023 Nissan Kicks from the Nissan dealer with a monthly payment of $500 at an interest rate of 11.5%. Later, she found out she could have obtained a much lower rate and saved $143 per month on her car payment.
She told Fox 26 News," I needed a car at the moment, so I went to the dealership and signed whatever paperwork was necessary. Not the smartest financial choice on my behalf," she said.
Imani's experience is not unique. This scenario unfolds hundreds of times every week at new car dealers. A buyer, like Imani, walks in and needs a car right away. The salesperson finds them a car they like and then shows them how much their payment will be.
It's a situation many car buyers can relate to.
The salesperson first determines the buyer's monthly payment capacity and then structures the car deal accordingly. The car dealer will typically sell a payment that stretches the buyer's budget to the limit.
They can then sell a customer a more expensive car by increasing the loan term. The longer the loan term, the lower the monthly payment. The interest rate is usually higher because they have pre-arranged financing with a bank.
The dealer can quickly pre-approve the customer for the loan while they wait, which speeds up the sales process. The customer then drives home in a new car in a couple of hours.
However, it's generally not a good deal for the customer.
After purchasing the 2023 Nissan Kicks from the Nissan dealer, Imani checked around and found that she could have obtained a much lower interest rate, resulting in significantly lower payments.
The report from Fox 26 states that she looked online and found an auto refinancing website called Caribou, which offered lower car loan rates, thereby reducing her monthly payment.
"My original payment was $497, and now, including the gap insurance, it's $343. So it's a big difference," Imani said.
She's now saving $154 a month.
What would you do with an extra $154 per month?
Imani says," I'm able to put a little more towards savings to make bigger purchases in the future, whether it's traveling or buying a home one day. There are a few things I'm looking at, so I'm able to see that goal come closer to me every day with that extra money," she said.
Are You Paying Too Much For Your Car Loan?
You aren't alone. According to Yahoo Finance, the average new car payment is $734, while the average used car payment is $525.
What Should You Do If You Have a High-Interest Car Loan, and What Are Your Best Refinancing Options?
Bankrate says when it comes to finding the best rate for a used car loan, knowledge is power. You should explore several options and compare offers based on your financial situation. This step can make a significant difference in the amount you pay each month.
1. Determine your financial standing:
- Check your credit score: Your credit score is a crucial factor in determining the interest rate you'll be offered, with higher scores generally leading to lower rates. You can obtain free credit reports from the major credit bureaus and your credit score from your bank or a free online service.
- Evaluate your debt-to-income (DTI) ratio: Lenders consider your DTI to assess your ability to repay a loan.
- Assess your income: Ensure your income is sufficient to manage monthly car payments.
2. Research potential lenders:
- NerdWallet says to consider different types of lenders:
- Credit Unions: Credit unions are known for typically offering lower interest rates than banks. They are member-owned cooperatives that return excess earnings to members in the form of lower loan rates.
- Online Lenders: Online lenders often have streamlined processes and may offer competitive rates due to lower overhead costs.
- Banks: Large national banks and community banks offer a range of auto loan products, but may have stricter qualification requirements.
- Dealerships: While convenient, dealerships may mark up interest rates to profit from arranging financing.
- Identify lenders offering competitive rates: Based on recent data:
- Navy Federal Credit Union: Offers rates as low as 4.99% for used car loans but requires military affiliation.
- Consumers Credit Union: Offers rates as low as 5.99% with a minimum credit score of 620.
- Digital Federal Credit Union: Offers rates as low as 5.99% with a minimum credit score of 600.
- Bank of America: Offers rates as low as 5.99% for used car loans.
- PenFed Credit Union: Offers rates as low as 6.49% with a minimum credit score of 650.
- LightStream: Offers used car purchase loans with estimated APRs from 6.99%-15.79%.
- Alliant Credit Union offers used car purchase loans with estimated APRs ranging from 5.86% to 26.25%.
- Carvana offers used car purchase loans with estimated APRs ranging from 7.95% to 27.95%.
3. Apply for pre-approval and compare offers:
- Experian says to get pre-approved with multiple lenders: Apply with at least three lenders to compare the actual rates you may be eligible for. Prequalification is a soft credit check that won't significantly impact your credit score, whereas preapproval involves a hard credit check and provides a more definitive offer.
- Compare the Annual Percentage Rate (APR): The APR encompasses the interest rate and any applicable fees, providing a comprehensive representation of the total cost of borrowing.
- Consider other loan terms: Factor in the loan term, minimum loan amount, and any restrictions on the type of vehicle you can finance.
4. Improve your chances of getting a better rate:
- Increase your credit score: Work to improve your credit score by paying down existing debt and making timely payments.
- Make a larger down payment: A larger down payment reduces the loan amount and the lender's risk, which can potentially result in a lower interest rate.
- Consider a shorter loan term: Shorter terms generally have lower interest rates and lower total interest paid over the life of the loan.
- Consider using a cosigner: If your credit score is low, a cosigner with good credit can help improve your chances of approval and potentially secure a better rate.
Conclusion
By following these steps, you can increase your likelihood of finding the best possible interest rate for your used car loan. Remember that rates vary based on your financial situation, so comparing personalized offers is crucial.
One of the most crucial steps in securing a favorable car loan is to research potential lenders thoroughly. This proactive approach can help you find the best rates and terms that suit your financial situation.
Imani discovered that the financing she received for her 2023 Nissan Kicks from the dealer was not a good deal. By refinancing, she saved $143 per month.
"I have a 2023 Nissan Kicks. I bought one three times; I love that car," she says, laughing. But, I will never go with dealer financing again."
How About You?
Do you have a high-interest car loan, and have you refinanced into a lower interest rate? How much did you save? If so, click the red Add New Comment link below and let us know.
Check out my Nissan dealer story: A Nissan Dealer Bait-and-Switched Me, Told Me a Car Online Was ‘Not Operational’, Then Pressured Me To Buy a More Expensive Car and a Loan I Couldn’t Afford
I am Denis Flierl, a Senior Torque News Reporter since 2012. My 30+ year tenure in the automotive industry, initially in a consulting role with every major car brand and later as a freelance journalist test-driving new vehicles, has equipped me with a wealth of knowledge. I specialize in reporting the latest automotive news and providing expert analysis on Subaru, which you'll find here, ensuring that you, as a reader, are always well-informed and up-to-date. Follow me on my X SubaruReport, All Subaru, WRXSTI, @DenisFlierl, Facebook, and Instagram.
Photo credit: Denis Flierl
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