You’ve shopped for your auto loan. Now it’s time to negotiate your loan terms. When you look for a vehicle, you may know that you can negotiate the vehicle’s price, but did you know that you can also shop around for and negotiate the terms of your auto loan? Shopping for loans and trying to get the best rates and terms, while complicated, is like other types of comparison shopping. Shopping and negotiating can save you hundreds or even thousands of dollars over the life of your loan.
Know what is negotiable… While you may know that you can negotiate over the price of the vehicle and the interest rate, it’s also important to know all the factors that you can negotiate over that may impact the cost of your auto loan. You should consider all these factors when you buy and finance a vehicle. In addition to the price of the vehicle, here are some other terms or costs that you can negotiate:
Cost 1. Trade-in value (if you trade in your vehicle) and down payment amount
Cost 2. Annual Percentage Rate (APR) and interest rate
Cost 3. Length of loan
Cost 4. Whether or not there will be a prepayment penalty
Cost 5. Price of optional features and services for the vehicle or the loan such as extended warranties, credit life insurance, GAP insurance, alarm systems, tire and wheel protection, window tinting, and other products
Item 6. Fees charged by the dealer such as dealer preparation fees, delivery charges, and document fees
However, you cannot negotiate taxes, vehicle title, and registration fees. These fees are set by your local or state government…
Be very cautious of some biweekly payment plans… It is possible to be offered an auto loan with biweekly payments instead of monthly payments. This may make the loan look more affordable than it really is because of the smaller payment. There also may be additional fees charged for enrolling in a biweekly payment plan. If your loan has biweekly payments, there will be some months when you will have three payments instead of two. This is because there are 26 biweekly payment periods every year, the same as if you were making 13 monthly payments instead of 12. Make sure that you know whether your loan payments are monthly or biweekly, and factor the extra biweekly payments into your budgeting if you make this choice.
Negotiate to lower the total cost, not just the monthly payment… When you are looking for a loan, you may find it easy to focus just on the monthly payment or the price of the vehicle. But looking at just one factor doesn’t give you the whole picture. A lower payment doesn’t necessarily mean a lower interest rate; it might just mean that you are paying for a longer time. The best way to compare auto loans is by using the total cost of the loan. Use the auto loan worksheet at the end of this guide to help you calculate and compare the total cost.
Your total loan cost starts with the amount financed. The amount financed is the amount of money you are borrowing. It includes the price of the vehicle, taxes and other government fees, as well as any optional add-ons like extended warranties and optional credit insurance, minus your down payment and any trade-in amount. The amount financed does not include the cost to borrow the money. That cost is known as the finance charge and includes interest and certain fees over the life of the loan. Your total loan cost is the amount financed plus the finance charge. By negotiating for better terms on your loan, you can reduce the total amount of money you pay over time. For example:
1. Getting a lower interest rate means you will pay less to borrow money. The total cost of your loan will be lower.
2. A shorter loan term (in which you make monthly payments for fewer months) will lower your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan.
3. A higher down payment, or a higher price for your trade-in, will reduce the total amount financed because you will have to borrow less money.
4. Optional add-on products like extended warranties, GAP insurance or credit insurance that are added into your loan amount will increase your total cost because you will be borrowing more money…
While a lower monthly payment for a longer period of time may look like the way to go, consider the total interest cost over the term of the loan. Let’s assume you paid off a $20,000 loan in 3 years at a 4.75% interest rate, you will pay $1,498 in interest. For a 6 year loan, you will pay $3,024 in interest–more than twice as much. Some financial advisers recommend keeping the length of your auto loan to 5 years or less, reasoning that the longer the loan, the more likely you will owe more than the vehicle is worth. On the auto loan worksheet enter the amounts on several loans you are comparing to see your estimated monthly payments, total interest cost, and the total cost that you will pay over the life of the loan. For additional help, there are a number of auto loan calculators available online. For example, Consumer Reports (consumerreports.org) and the NADA Guides (nadaguides.com/Cars/Payment-Calculator) provide online auto loan calculators that may be helpful in evaluating and comparing the costs and terms of various auto loans.
Keep track of multiple factors while negotiating… When you are negotiating for financing with a lender or at a dealership, make sure you are keeping track of all the factors that go into the total cost of the loan. If you are negotiating the interest rate, make sure that you also know the length of the loan and other terms. Comparing total loan cost will help you keep an eye on these multiple factors. Use the auto loan worksheet to help keep track of the different factors.
Ask the dealer to tell you the price, trade-in amount, interest rate, term of loan, estimated monthly payments, and write these numbers down on the auto loan worksheet. It’s best to get these numbers early in the process, so you can better compare and negotiate.
Just as the first price you are offered for the vehicle may not be the lowest price available to you, the first rate for a loan the lender or dealer offers you may not be the lowest rate you qualify for. If the lender or dealer agrees to a better loan feature (such as a lower APR or interest rate), check to make sure that the other factors like the length of the loan or the amount financed haven’t changed. A lower monthly payment doesn’t necessarily mean a lower interest rate; it might just mean that you are paying for a longer time. After you’ve agreed on the price of the vehicle, here are some additional tips to help you negotiate the best loan:
Tip 1. Know what your trade-in is worth and bargain over the amount you will get for your trade-in. This will reduce the amount you borrow.
Tip 2. Negotiate over the interest rate for your loan, comparing interest rates obtained from your bank, credit union, or other lender with the rate you are offered by the dealer.
Tip 3. If the dealer is arranging your financing, make sure you understand how the interest rate was determined and ask if your credit score qualifies you for a loan with better terms.
Strengthening your position at the bargaining table… You are not required to get a loan from a dealer or trade in a vehicle in order to purchase a car from a dealer. A bank, credit union, or other lender may offer you better loan terms than the dealer. Bringing a loan quote or preapproval from another lender to the dealer can place you in a stronger bargaining position to negotiate good financing terms with the dealer. Then you can decide which loan to accept.
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