When shopping for a car, most people spend a lot of time hunting for the best deal on the car but don’t spend enough time on finding a great interest rate. This article illustrates an effective strategy for you to obtain a great interest rate when financing for a vehicle.
Before we begin, ensure that you know your priority. Are you primarily concern with monthly payment (affordability), convenience (one-stop shop), or maintaining relationship, e.g. your local banker? If the answer is yes, then this article may not be for you. Otherwise if getting a low rate is your goal, then let’s get started.
Step 1: Know where you stand and be honest with yourself
Obtain a free credit score. You can get it here, but most national banks, like Bank of America of Wells Fargo, offer free FICO credit score. According to OneMain Financial, you would need a FICO score of 720 or above to get the best offered interest rate. If you are one of these lucky individuals, great! If not, don’t sweat it. Just know that you may not get the advertised rate, but you can still get a rate that you’d be happy with.
Step 2: Shop around
This is the most important step. To shop around, it is important that you get quote from different type of financial institutions. For example, the difference in rates between Bank of America and Wells Fargo will not be that great. Here’s another drawback for big banks. National banks usually offer more services, conveniences, and tools. However, in general they typically do not offer the best rate when it comes to financing.
Community banks, though lack some of the benefits, could offer very competitive rates. Look up local banks near you, then call and ask: “what is your rate for auto loan for those with outstanding credit score?” Even if you don’t have outstanding rate, ask the same question. We are trying to compare apple to apple here. If the answer is “it depends on your credit score and other factors”, then move on. Banks that have great rate usually run a promotional campaign and would be more than happy to throw that rate at you.
Look up credit unions near you. Historically, many credit unions are reserved for certain groups of people, like teachers or military personnel. However, there are many credit unions that offer membership based on geographic areas. So as long as you live or work in the designated area, you would be eligible for membership. Though, to be safe, you can call them or go to their website, click “join now” or “open an account” and see if you are eligible. Once you know that you could be eligible for membership, repeat the same process with the community banks and ask “what is your rate for auto loan for those with outstanding credit score?”
Narrow down to three to four local banks and credit unions proceed with moving forward. Though, make sure you emphasize that you are shopping for the best rate, and ask them to make sure they do a “soft pull” on your credit so that your credit score doesn’t get affected.
Remember, if your credit score is not “outstanding”, you may not get the advertised rate, but you should have at least one competitive rate from the three or four different quotes you received, and most likely it would come from a credit union.
Once you are pre-approved with at least one competitive rate, you are ready to leverage your negotiation power.
Step 3: Let the dealer work for your money
When shopping for a car, the one question that always comes up is “how do you plan to finance the car?” Be sure you let the sale rep know that you have pre-approval from a bank or credit union, and unless their financing department can beat this rate, let’s not waste each other time. Regardless, the sales rep will mostly likely try to take you through the dealer’s financing department. The dealer’s financial rep usually works with numerous banks (similar to a broker), so most likely he or she can make magic happen and get you a better rate. Nevertheless, before agreeing to work with deal financial rep, be sure to re-emphasize that you have pre-approval from a bank or credit union, and unless their financing department can beat this rate, let’s not waste each other time.
Caveat to step 3. If you have outstanding credit score, the best rate may end up being the one that was pre-approved from the bank or credit union. In addition, sometimes the dealer financing rep could offer you a better rate, but the difference is marginal.
If you like this post, please share or comment. I love to hear your feedbacks.