Not many things are so exciting as the prospect of getting a new car. Whether that car is zero-miles brand-new or just new to you, a new ride always brings a smile to the face. But, before you figure out how to set your radio presets, you’re going to have to figure out how to pay for it. For many of us, that means financing.
If you’re going to borrow money to buy a car, you’re in luck. Auto loan interest rates are very competitive, and for those of you with good credit, you should expect an interest rate less than 4% and perhaps even as low as zero. There’s a right way to borrow money for a car, and that means shopping around for the best deal. There are seemingly countless lenders in the U.S. that will lend you money for auto financing with a variety of deals. You should get a cross section of the type of terms available for your financing.
Thankfully, credit scoring systems have long been designed with this rate-shopping practice in mind. When the auto dealership or the auto lender pulls your credit reports, they’ll leave behind an automotive-related credit inquiry. Credit scoring systems are sophisticated enough to recognize that multiple auto-related inquiries over a short period of time indicate that you are shopping around for one car loan rather than applying for many loans.
Depending on the make and model, you’ll likely be able to borrow money from up to four different types of lenders. Those lenders are banks, auto finance companies, credit unions and captive lenders. They are similar in that they are all creditors, but they differ in the specific terms they are likely to offer.
Banks, Credit Unions and Finance Companies
Almost every bank will lend you money to buy a car. Banks’ rates are going to be very competitive, and if you have solid credit scores, you are going to get a great deal. A finance company may not be as competitive as a bank because these companies tend to service borrowers with less-than-stellar credit reports and scores. In fact, the rate you get from a finance company can be several times higher than the rate you can get from a bank. But, if you’ve got bad credit, then your options are always going to be limited and more expensive.
Credit unions are also going to be very competitive, perhaps even more competitive than banks. The only way you will know is to speak with your credit union about what kind of deals they are currently offering for new or used auto financing. When you formally apply for the loan, you’ll see what you get. But before you do you might want to consider doing business with the captive lender.
What Is a Captive Lender?
A captive lender is the financing arm of the manufacturer. For example, Ford Motor Credit is the financing arm of the Ford Motor Company. Toyota Financial Services is the financing arm of Toyota. Ally Financial, Chrysler Finance, American Honda Finance and Mercedes Benz Financial are other examples of large captive lenders. Most large auto manufactures have their own financing arm to finance the sale, in large part, for their own car brand.
The captive lender has ultimate flexibility when setting interest rates. In fact, if you have good enough credit, some captive lenders will go as low as zero percent (yes, free money!) to help sell one of their cars and move it off the lot and onto the road. Even if you were going to pay cash for your car, zero percent financing is hard to pass up.
As far as the arrangement of financing, you can do that yourself or you can let the finance and insurance manager at the dealership set up financing for you. You may do better with a bank or credit union if you contact it directly and apply for an auto loan. If you’re interested in considering options from the captive lender, you can also approach it directly or ask the dealership to arrange the financing with it.
The bottom line is: You must be willing to avoid the temptation to rush into a purchase without first considering your financing options. That new car smell can be so irresistible that you just want to drive that new car home, now! You can save big bucks, however, if you’re willing to wait for the test drive until after you have already arranged the financing.