Negotiating the best interest rate is just as important as negotiating for the lowest sales price of your new vehicle. Luckily for customers, it can be a much quicker and easier process.
It is no secret that dealerships make money on loans by marking up the interest rate. You are going to want to protect yourself from this practice by doing research and having your own loan to fall back on if the dealership cannot offer you good enough terms.
Start by applying for a car loan from a local credit union, or a bank that you have a relationship with. If you are sure you are going to purchase a vehicle I would even recommend getting a couple loan offers to see the best terms you can get.
For each loan you apply for there will be a credit check, or inquiry. Whenever a dealership submits your credit to a bank there will also be a new credit check. Read Will Multiple Loan Applications Ruin My Credit? to understand how that works.
When applying for a loan make sure you get the right interest rate for the length of the loan. The longer the loan is the higher the interest rate might be, usually a 4 year loan will have a better rate than a 6 year. Confirm with your credit union or bank the length of the loan before you take that interest rate to a dealership.
Because the dealership wants to earn your business on the loan, they will try to find a better interest rate with their lenders, and if they can you should absolutely take it!
Dealerships work with multiple banks and based on the business they generate for those banks dealerships often have access to excellent deals. Let the dealership work for you on your behalf; you have nothing to lose.
If the dealership cannot beat the loan you received from your bank, that is ok too. Just let them know you want to use the loan you found.
Sometimes, and this was a common situation at the Ford dealerships where I worked, manufacturer programs can come into play. Either:
- A rebate can dependent on you taking a loan from that manufacturer. For example a $1000 rebate for a Ford F-150 is dependent on you taking a loan from Ford Motor Credit.
- A lower interest rate is available instead of a rebate. For example Toyota will give you a 0% loan but you lose a $1500 rebate.
What to do: Listen to the offer, it is very possible that it can save you money! If during the life of the loan you will pay less overall, then take the special offer.
One more (very) important note: If the dealership cannot offer you a better loan, and refuses to accept your loan I would strongly consider shopping at a different dealership. The dealerships I have worked for never turned down the opportunity to sell a car because we could not provide a loan to the customer.