Car Buying Advice
Car Buying Guide
Whether you are looking for a fuel-efficient small car, a sporty convertible, or a family minivan Consumer Reports can help lead you through the new car buying experience. This guide provides the essential information you need to choose,
buy, finance, and maintain a new car.
- Car financing
- Car insurance
- After the sale
- Used car guide
Choosing a car:
In this section
Insurance
In this section
- Financing alternatives
- Where to shop for a loan
- Used car leasing?
Insurance
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.
Dealerships are always willing to arrange financing because it's profitable, and most have several sources readily available. The big appeal of dealer financing is its simplicity. There's no need for you to shop around; all you have to do is show up, sign a few papers, and drive away. But that convenience will probably end up costing you more money.
Many people don't realize that dealer financing is just another product the dealer sells, and the profit motive is alive and well there. Frequently, what you think is an auto loan is really what's known in the car business as a retail installment sales contract, or RISC. The dealer signs the RISC with you, then sells it to a bank or other lending institution. Dealers usually get a cut of the interest rate, so the higher the APR they charge you, the more money they make. As we've mentioned, many dealers also bump up your rate to earn more profit. Fortunately, you don't have to buy their products just because they're convenient. Unless there is a subsidized low APR from the manufacturer, you'll almost always find lower loan rates elsewhere.
Online financing has changed finance shopping in the same way that online car shopping has changed the way you can look for a new vehicle. Just to illustrate how your choice of lenders has exploded, go to a search engine, such as Google or Yahoo, and search for "online auto loans." You'll be amazed to see the number of listings that pop up.
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.
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.
Dealerships are always willing to arrange financing because it's profitable, and most have several sources readily available. The big appeal of dealer financing is its simplicity. There's no need for you to shop around; all you have to do is show up, sign a few papers, and drive away. But that convenience will probably end up costing you more money.
Many people don't realize that dealer financing is just another product the dealer sells, and the profit motive is alive and well there. Frequently, what you think is an auto loan is really what's known in the car business as a retail installment sales contract, or RISC. The dealer signs the RISC with you, then sells it to a bank or other lending institution. Dealers usually get a cut of the interest rate, so the higher the APR they charge you, the more money they make. As we've mentioned, many dealers also bump up your rate to earn more profit. Fortunately, you don't have to buy their products just because they're convenient. Unless there is a subsidized low APR from the manufacturer, you'll almost always find lower loan rates elsewhere.
Online financing has changed finance shopping in the same way that online car shopping has changed the way you can look for a new vehicle. Just to illustrate how your choice of lenders has exploded, go to a search engine, such as Google or Yahoo, and search for "online auto loans." You'll be amazed to see the number of listings that pop up.
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.
Next:
Used car leasing?
