What is the cheapest way to finance a car purchase?
When you finally make the big decision to buy a new car, there are many options to consider. Obviously, you have to consider what kind of car you want and what prices fit into your budget. Financing a car is a big responsibility. Between the down payment, insurance, your monthly payments, and scheduled maintenance, a lot of money goes into car ownership. Most people try to save money wherever they can, and choosing a lender is a huge part of that. Most people either take out a loan from a bank, lender, or use dealership financing options. So which one is the cheapest?
Simple answer: it depends. There are many factors that control how cheap or expensive different lenders are.
Banks are usually the cheapest lenders. Many banks, and especially credit unions, offer interest rates below 10% on their loans.
Typically, dealers' interest rates are higher than bank interest rates because they are an intermediary. They charge any interest rate that banks offer them. As a rule, the average mark-up is about 2.5%. The amount by which the dealer can increase the interest rate is controlled by the government.
But dealers make good deals from time to time. Many dealers have special offers where they offer 0% for a certain period of time. Interest-free payment means a cheaper payment for a car for a specified period of time. You can't beat this! Banks and other lenders won't be able to offer you such a low interest rate because they won't be able to make money that way. Dealers are already profiting from selling you a car, so the zero interest rate is their incentive to bring you to the dealership.
Dealer interest rates can also be negotiated. Although the interest rates at both the dealership and the bank are based on credit scores, the dealership does have some leeway on the rate they charge you due to the markup. If they give you an interest rate you don't like, you can haggle to get out of it. Bank interest rates are set and cannot be dissuaded from doing so.
While the dealership is a one-stop shop, making it easy to get a loan and a car at the same time, most banks and credit unions will let you apply for a loan online in minutes.
The Bank Rate publishes three-month trends in average car interest rates. This will help you determine if the rate you are being charged is reasonable.
Long-term availability depends on the interest rate you get and how long it lasts. The better your credit score, the more likely you are to get a good interest rate deal. Car payments can last 3 to 7 years at the most, so a lower interest rate is key to paying less for a car in the long run. Take your time and do your research before jumping head first into car financing. Keep an eye out for promotions from the dealer as well as your bank. Proper timing for a purchase can result in saving money in the long run.
