Car Buying Advice
Step-by-step: Buying a new car
Not sure where to start? Whether you are looking for a fuel-efficient small car, a sporty convertible, or a family minivan, Consumer Reports can help guide you through the new car buying experience. We give you the essential information you need to choose, buy,
finance, and maintain a new car. Also, see our used car guide.
- Car financing
- Closing the deal
- After the sale
Choosing a car:
In this section
Closing the deal
In this section
- Pros and cons of leasing
- Buying vs. leasing basics
- Five keys to the best loan rate
- Where to shop for a loan
- Financing alternatives
Closing the deal
Where to shop for an auto loan
There are several ways to arrange credit for a vehicle. Some are better than others.
Walking into a dealership with a guaranteed auto loan in your hand gives you bargaining power and flexibility. It also helps you avoid the common sales tactic of mixing up the vehicle price with financing costs. On the other hand, going into the dealership without the foggiest notion of how you are going to finance your purchase is setting yourself up to be manipulated and possibly overpay.
At a time when automakers are offering aggressive low-interest financing incentives on many models, a dealership may be able to offer you the best financing terms. But you should do your homework beforehand by carefully shopping around for the best loan offers so you have a comparison point. Here are several places to look:
Banks have been in the auto loan business for almost as long as there have been autos. They generally have very specific, conservative loan policies and may only cater to those with better credit references. As such, banks are in a position to offer some very competitive loan rates. Since you probably have a relationship with at least one bank already, that might be a great place to start your financing search. Most banks have Web sites where you can check their current loan rates, but if you decide to apply for a loan, you should stop by a branch office and deal with a real person. It's a good way to control where your personal information goes, and by avoiding mistakes or misunderstandings, you might walk out the door with a pretty good interest-rate offer.
Credit unions operate a lot like banks but they lend money only to their members, who are also owners of the credit union itself. Because they are nonprofit, their operating costs are fairly low and their lending rates can be quite competitive. Many people belong to credit unions just to take advantage of the convenient loan policies.
Finance companies Almost every automaker has its own finance company, such as GMAC or Ford Credit, but there are also hundreds of independent ones, too. Large or small, they all operate like a retailer, but what they sell is money. They borrow it at wholesale rates, mark it up, and lend it out at retail rates. Finance companies are typically less conservative than banks and other lending institutions, but you'll pay for their "generosity" with higher interest rates.
Dealerships that refer you to a finance company usually get a piece of the action—a financial reward for their efforts. If your credit rating is such that you can't get a loan from a bank or credit union, a finance company might be your last resort. Because of their willingness to lend to those who might be higher credit risks, finance companies are generally the most expensive sources of auto financing. The rationale is that higher lending rates are needed to cover potential credit losses.
Online banks. Online lenders can be competitive. Instead of visiting a local office, you apply over the Internet. To find them, check do a Web search for "online auto loans." Online financing has a downside, however. It may be difficult to control where the information you provide about yourself goes, and you may be bombarded with e-mail and phone calls from lenders you never heard of or contacted in the first place. Be sure to check each Web site's privacy policy before providing personal information. As a precaution if you're not familiar with the lender, check out its site with the Better Business Bureau (www.bbb.org).
Dealerships. Along with arranging loans from automakers, dealers work with banks and other independent sources. One benefit to arranging financing through a dealer is convenience. But often the rates they quote include a markup for the dealership itself, which can make these loans expensive. Armed with offers from some of the other sources we've mentioned, you may be able to negotiate the dealer's initial quote down to something attractive. But you must do your homework first.
Also, some dealers advertise that they will work with buyers who are credit risks, but you should count on paying a high APR.
There are several ways to arrange credit for a vehicle. Some are better than others.
Walking into a dealership with a guaranteed auto loan in your hand gives you bargaining power and flexibility. It also helps you avoid the common sales tactic of mixing up the vehicle price with financing costs. On the other hand, going into the dealership without the foggiest notion of how you are going to finance your purchase is setting yourself up to be manipulated and possibly overpay.
At a time when automakers are offering aggressive low-interest financing incentives on many models, a dealership may be able to offer you the best financing terms. But you should do your homework beforehand by carefully shopping around for the best loan offers so you have a comparison point. Here are several places to look:
Banks have been in the auto loan business for almost as long as there have been autos. They generally have very specific, conservative loan policies and may only cater to those with better credit references. As such, banks are in a position to offer some very competitive loan rates. Since you probably have a relationship with at least one bank already, that might be a great place to start your financing search. Most banks have Web sites where you can check their current loan rates, but if you decide to apply for a loan, you should stop by a branch office and deal with a real person. It's a good way to control where your personal information goes, and by avoiding mistakes or misunderstandings, you might walk out the door with a pretty good interest-rate offer.
Credit unions operate a lot like banks but they lend money only to their members, who are also owners of the credit union itself. Because they are nonprofit, their operating costs are fairly low and their lending rates can be quite competitive. Many people belong to credit unions just to take advantage of the convenient loan policies.
Finance companies Almost every automaker has its own finance company, such as GMAC or Ford Credit, but there are also hundreds of independent ones, too. Large or small, they all operate like a retailer, but what they sell is money. They borrow it at wholesale rates, mark it up, and lend it out at retail rates. Finance companies are typically less conservative than banks and other lending institutions, but you'll pay for their "generosity" with higher interest rates.
Dealerships that refer you to a finance company usually get a piece of the action—a financial reward for their efforts. If your credit rating is such that you can't get a loan from a bank or credit union, a finance company might be your last resort. Because of their willingness to lend to those who might be higher credit risks, finance companies are generally the most expensive sources of auto financing. The rationale is that higher lending rates are needed to cover potential credit losses.
Online banks. Online lenders can be competitive. Instead of visiting a local office, you apply over the Internet. To find them, check do a Web search for "online auto loans." Online financing has a downside, however. It may be difficult to control where the information you provide about yourself goes, and you may be bombarded with e-mail and phone calls from lenders you never heard of or contacted in the first place. Be sure to check each Web site's privacy policy before providing personal information. As a precaution if you're not familiar with the lender, check out its site with the Better Business Bureau (www.bbb.org).
Dealerships. Along with arranging loans from automakers, dealers work with banks and other independent sources. One benefit to arranging financing through a dealer is convenience. But often the rates they quote include a markup for the dealership itself, which can make these loans expensive. Armed with offers from some of the other sources we've mentioned, you may be able to negotiate the dealer's initial quote down to something attractive. But you must do your homework first.
Also, some dealers advertise that they will work with buyers who are credit risks, but you should count on paying a high APR.
Last reviewed: February 2011
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Financing alternatives
