If you're in the market for a new car, you may already have some sort of money-saving plan. Perhaps you're waiting until the end of the model year when dealers are trying to get rid of their inventory. Or maybe you've had your current car detailed in order to maximize its trade-in value.
While those can certainly be smart ways to save money, there are some other strategies that can be even more effective. Here are three suggestions that could help you save hundreds, or even thousands, of dollars on your next car.
Keep the steps of the process separate
One of the biggest tricks car dealers use to get their customers to pay more than they should is to combine the purchase, financing, and trade-in into a single negotiation. The classic line you'll hear is something to the effect of "tell me what kind of monthly payment you can afford on your new car, and we'll go from there."
Let me be perfectly clear. Under no circumstances should your monthly payment be involved in your negotiations. Telling a salesperson the monthly payment you want is like giving them permission to charge you whatever price they want, give you whatever APR they want, and make your loan term as long as they want, as long as it's under a certain amount each month. If you want the best deal, there are three steps you should follow:
- First, negotiate the sales price of the vehicle you're looking at. At this point, act like you're a cash buyer or tell the salesperson that you'll talk about financing only after you've agreed on a price.
- Then, negotiate a price for your trade-in. Too many people get duped by being offered a great trade-in price if they'll pay full sticker price on the new car, or with some similar trade-off. It's also a good idea to have a sense of what your trade-in is worth before you get to the dealership -- you can find that info at websites such as kbb.com.
- Once the prices are agreed upon, then talk to the finance manager. A really smart buyer will have obtained at least one other financing quote before walking in to the dealership for comparison purposes, but we'll get to that later on.
It's also important to note that all three of these things don't need to take place under the same roof. If you aren't happy with the trade-in value the dealer is offering, take your car somewhere else for a second opinion. Businesses like CarMax will give you an offer even if you aren't buying one of their cars. Similarly, if the dealership's financing is inferior to what you can get elsewhere, or if they insist on pushing bad loan products (like 84-month loans), go somewhere else for financing. The point is that these are separate parts of the car-buying process, so treat them as such.
Do some work on your credit
To be perfectly clear, you don't need an excellent credit score to buy a car. In fact, more than one-fourth of auto loans made in a recent quarter were to buyers with subprime or deep-subprime credit ratings.
Having said that, a better credit score could save you thousands of dollars in interest over the term of your car loan. To illustrate this, let's say that you want to borrow $30,000 to buy a new car and that you'd like to repay the loan over a term of 60 months. Here's a look at the current U.S. average interest rates by credit score tier, and the total interest you can expect to pay.
|FICO Score Range||U.S. Average APR||Monthly Payment||Total Interest|
Data source: www.myFICO.com. Average APRs as of 9/7/2018.
Great credit takes time to build -- plain and simple. If you have a 600 FICO score, you're not likely to raise your credit to a top-tier score in a short period of time.
Having said that, there are a few things you may be able to do that can boost your score by a few points quickly. As you can see in the chart above, if you have a FICO score of 650 and manage to increase it above 660, it could save you more than $2,500 in interest in our hypothetical situation.
The "amounts owed" category makes up 30% of your FICO score, and if you have significant credit card debt, it is the category that could have the most immediate impact. Paying down a good chunk of your credit card debt could potentially raise your score by a significant amount. Similarly, one "amounts owed" trick is to call your card issuers and ask for higher credit lines. The amount you owe relative to your credit limit is a big factor, so a higher limit translates to lower credit utilization.
Shop around for a lender
I mentioned earlier that it's a good idea to get a financing quote from an outside source before you even set foot inside a car dealership. Better yet, get a few quotes -- you may be surprised at how different your loan offers can be from lender to lender.
And applying with a few different lenders won't hurt your credit score. The FICO formula has a rate-shopping provision, which says that as long as all of your loan applications take place within a "normal shopping period" of two weeks, it will count as a single credit inquiry.
Even a relatively small difference in interest rates could save you hundreds of dollars over the term of your car loan, and since it's all the same to your credit score whether you apply for one loan or a dozen, it's certainly worth your time to shop around.