Automobile Financing

Special Report: Hitting the Brakes on Auto Dealer Loans
How to drive a hard auto loan bargain

by Broderick Perkins

Hybrid Car

With auto dealer loans often padded with $1,200 to $1,700 more than may be necessary over the life of the loan, learn how to shop for a car loan before you get to the dealership.

A recent Center for Responsible Lending (CRL) report "Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses," says the fees are costing 2009 car buyers $25.8 billion over the life of their car loan.

Subprime borrowers, those with poor credit, are getting dinged deeper and the report links dealer mark ups to higher rates of default and repossession, particularly among subprime borrowers.

(Also see: "Special Report: Hitting the Brakes on Auto Dealer Loans - Auto dealer loans can be as toxic as outlawed mortgages")

After your mortgage, buying a car is likely your largest single debt.

Put the brakes on high cost auto loans with these tips.

• Check your credit first.

You need to know and correct, if necessary, your credit report before the lender takes a gander. There's only one federally sanctioned place to accomplish that for free: AnnualCreditReport.com. You can also call 1-877-322-8228. Beware of "free" credit report pretenders and never shop for any credit without being fully aware what's on all three of your reports. One from each agency -- Experian, Equifax and TransUnion -- is free every year. Your credit score is also free under some circumstances, but worth knowing even if you have a pay a few bucks.

• Get a loan, then buy a car.

A guaranteed auto loan in your pocket helps you avoid a common sales tactic -- mixing vehicle price and financing negotiations. Mixing allows the dealership to give you a favorable figure in one area, while inflating a figure in another area.

Special manufacturer-provided zero or low interest rates for special vehicles or during promotions may be the exception, provided you lock down the price first and you first shop around to learn what interest rate is a real deal.

Likewise, don't forget to shop around for car insurance, rather that taking the dealer's offer.

CRL also advises:

• Test drive, but don't shop.

You should know what type of car you want and your price range, before you shop around for financing. If you do, there's a greater chance you can get pre-approved.

Shop around at your bank and credit union and elsewhere to comparison shop. If you know your credit score and have you credit report you can negotiate to get a quote without several lenders pulling your credit report just yet.

• Drive a hard bargain.

Despite the advice, eight out of 10 car buyers are snookered by convenience or heavy marketing into financing through a car dealer. If you find yourself in the dealer's finance department be firm. Negotiate for the lowest interest rate.

"If 80 percent of car buyers are financing their vehicles through the dealership, then only 20 percent are getting a good deal through a bank or credit union. The car-buying consumer's time would be better spent lining up financing first before thinking about hitting the showroom floor," said Nancy Osborne, chief operating officer of ERATE, a Santa Clara, CA-based financial information publisher and interest rate tracker.

You shouldn't feel intimidated if you've done your homework. Knowing your credit history, credit score and rates from other lenders are negotiating points in your favor.

Watch out for rate mark ups. The car dealer may initiate the loan, but later attempt to sell the loan to a third-party lender, at your expense. Be prepared to walk if the dealer doesn't offer you a rate for which you know you qualify. Use it as a learning experience and take your business elsewhere.

Also, you have the right to take any car financing paperwork home before signing on the dotted line.

• Shop online.

The Internet can help you shop around for sticker prices on the car, financing, insurance and any other related products. Read web sites' privacy polices before completing any online applications so you know how you information will be used.

• Avoid add-ons.

Vehicle service contracts, guaranteed auto protection insurance, credit life and disability insurance, and a host of other add-ons typically are overpriced and unnecessary. The are profit makers for the dealer. Just as you should shop elsewhere for the loan and insurance, if you think you really need those add-ons, buy them elsewhere.

• Watch for tricks and traps.

In the "yo-yo" the dealer will offer you a low-low rate, let you drive a new car home and later tell you the financing fell through, hoping you'll fall in love with the car and accept a higher interest rate once you bring the car back.

"Buy Here-Pay Here" dealers finance used auto loans in-house to borrowers with no or poor credit. The loans have much higher interest rates than banks or credit unions, are often unsustainable and more likely to result in defaults and repossessions.

Ignore dealers who attempt to mask the true cost of the loan by focusing on the monthly payment. Shorter terms loans are cheaper over the life of the loan. Compare the total cost of all the loans you've compared and choose the one that's cheapest over the full term of the loan.