How to Negotiate Your Auto Loan

There’s no way around it – buying a car can be expensive – but there are certain things you can do to lower the cost. Here are some tips to help you negotiate your auto loan and get the lowest price possible.

Get your credit score

This is advice you’ll find we repeat often, but the very first thing you should do before looking to take out a loan of any sort is check your credit score. It’s something you should be doing once a year anyhow just to stay up to date on your finances, but it’s absolutely crucial to know where you fall before trying to negotiate a loan (this applies to auto loans, mortgages, and more).

This is also a good time to make sure there aren’t any errors or minor mixups that could be negatively affecting your score. You can use the information to try and pay any outstanding balances you might have forgotten about so you look more appealing to financiers.

Once you know whether or not you’re in good standing, you’ll have a better idea of the kinds of interest rates you’ll be offered by banks and dealers. The higher your score, the better the interest rate you’ll be offered.

Shop around and be prepared to put your money where your mouth is

Once you know your credit score, it’s a good idea to get pre approved by a bank or credit union before even stepping foot in a dealership. Know what your options are so you don’t feel trapped or stuck with the financing plan the dealer offers you.

Once you have a variety of options, you can try to negotiate with the lender who’s offered you the best rate. Armed with the information you’ve gotten from the other places you’ve visited, you can claim that you’ve found better financing terms elsewhere to see if they’ll be willing to cut the rate they’ve offered you.

Sometimes it works, sometimes it doesn’t. If it’s the latter, don’t be afraid to put your money where your mouth is and leave. Try a different lender, mention that you’ve been offered a certain rate and are hoping they can beat it. Chances are, dealers will be more receptive to haggling than banks because the dealership would rather cut a bit of their profit and keep the client rather than lose the sale entirely.

Don’t go based on monthly costs

When negotiating, focus on the overall price, not the monthly car payments. Even if you know how much you can afford each month, don’t tell the dealer. You give them control over negotiations and forfeit your ability to negotiate a lower purchase price.

Once a dealer knows how much you can afford a month, they have the wiggle room to hide other costs and add-ons depending on how much you can swing (higher interest rates, useless features like ‘etch’ and ‘rust proofing’, etc). If you can, try to negotiate each cost separately rather than in one combined amount (where it’s easier for the dealer to tack on hidden costs).

Keep your loan as short term as possible

One of the biggest dangers of negotiating the terms of your monthly payments rather than the actual price is something called an ‘upside down’ car loan. An upside down loan occurs when you end up owing more on your loan than how much the asset is actually worth.

By lowering the monthly payments, you just end up extending the duration of the loan, meaning you pay far more in interest than you should. Remember that your car loses value every year, and that the longer the loan, the worse the investment. You should never accept a loan term that exceeds 5 year. If you can take 4 years or less, you’re in the best place financially.

Don’t buy extras directly from the dealership

If you buy extras from the dealer at the time of car purchase, you will be faced with high price mark ups and they will try to pressure you into making a decision on the spot. Don’t forget that dealers want to make as much of an extra profit as they can, so while some of the add-ons they’re trying to sell you might sound like a good idea, they’re absolutely not worth the hiked up costs.

You can almost always find the same extras and add-ons for a lower price at sources outside of the dealership. Question every fee you don’t understand, and don’t be afraid to say no if you’re not sure.