When shopping for a car, chances are good that you’ve either seen dealerships or advertisements they have placed in newspapers or on the air that offer very low financing rates for new or even used cars. In fact, some will even offer zero financing! So why would anyone go to a bank to get their car loan instead?
What many don’t realize; especially if they happen to be a first-time new car buyer, is that these seemingly fantastic finance rates are NOT offered by the dealership, but rather by the vehicle manufacturer’s finance company. For example, if a hypothetical dealership known as Smith Ford says you can get a brand new Focus financed at 1.9% interest for 60 months, this is through Ford Credit, not Smith Ford. Moreover, in order to be approved for such a low rate, the buyer’s credit must be exemplary. In other words, if you were late on any mortgage payments or credit card bills due to an unexpected expense such as a furnace going out, you will likely not qualify.
When a dealership advertises zero interest, there is almost always a catch: You must pay the car off in a short time; such as three years. In this instance, a $30,000 car would set you back some $833 a month! In the event that someone offers zero percent for a longer term such as five years, this is because they are desperate to unload their inventory. The model in question is likely a slow-selling car or even about to be discontinued by the maunufacturer. Saturn is a perfect example. This entire division has been killed, and while there will still be parts and service available for the time being, it will be dried up within a few years. After that time, owners will have to rely on salvage yards or aftermarket parts, and that’s IF anyone bothers to make and/or sell them.
True dealership financing involves this scenario: “Come on down to Billy Bob’s Auto Mart! No credit? Bad credit? We approve EVERYONE! Buy here! Pay here! All of our cars are $5995 or less!”
Translation? They sell pieces of junk that have 150,000 miles or more showing on the odometer. Many of these cars were traded in to big-name dealerships and rejected. Thus, they were farmed out to auctions. Some of the cars may have been totaled and rebuilt following accidents or flood damage. The unwary individual shops at these places because this is all he or she can afford; and if unskilled in math fundamentals, doesn’t realize that they will be paying 22% interest out for five years, or that the car itself will be shot long before it’s paid off.
On the other hand, a bank will finance cars at a fair market rate of interest; provided you have an adequate credit history. Oftentimes, their rates will be lower than that of the big car manufacturer’s rates, or will offer more affordable terms so you don’t have to cough up half of your monthly income to make a car payment. Obviously, as in the case above, one would save money by paying no interest on a $30,000 car at $833 a month for three years, but how many of us could actually afford to do that? Currently, at this writing, a bank will finance a car at approximately 8% interest for a period of five years. Should you opt for a shorter term, the rates will drop about 1/2 of a percent for each year less. To illustrate, a four-year term would run around 7.5%.
Most of us want decent cars. We know that they are not cheap. We all know too well the phrase, “You get what you pay for.”
As such, most of us would never think about shopping for a car at some fly-by-night dealership that offers lot financing.
The key to car shopping is to research and find the most attractive interest rates out there. It stands to reason that most of us will already have checking and savings accounts; if not a mortgage; with a bank or credit union already. Give them a call. Chances are that you will be pleasantly surprised.