Get a loan offer before the dealer

The best time to look for a car loan is before you look at cars. If you walk into the dealer with a loan offer from a bank or credit union already in hand, you know what a fair rate is for you, and the dealer’s financing has to beat it.

How dealer financing works

When you finance at the dealer, the dealer usually is not the lender. It sends your application to one or more banks, credit unions or finance companies. A lender that approves you tells the dealer the rate it will accept.

The rate the dealer offers you can be higher than that. The Consumer Financial Protection Bureau explains that a dealer may add a markup to the rate the lender offers, and the dealer can keep part of the extra interest as its pay for arranging the loan. It is a normal part of how dealer financing works, and it is one reason the rate is worth negotiating. The FTC’s advice on car financing also says the rate a dealer offers can be negotiated.

Where to get a loan offer

• Your own bank. It already knows you.
• Credit unions. They are member owned and often have good car loan rates. You may need to join, and many are open to anyone who lives or works in an area. MyCreditUnion.gov, from the National Credit Union Administration, explains how to find and join one.
• Online lenders. Compare their APR and terms the same way.

Words vary by lender. A prequalification is often a quick estimate based on a soft check of your credit, which does not affect your score. A preapproval is usually a firmer offer with an amount, a rate and an end date, and it usually involves a hard inquiry. Ask which one you are getting, and note the date it runs out.

Shopping rates without hurting your score

Each application for credit can put a hard inquiry on your report. The scoring companies know people shop around for a car loan, so they treat a burst of car loan applications differently from opening a pile of credit cards.

• FICO says its scores ignore car loan inquiries made in the 30 days before the score is worked out. Past that, it counts car loan inquiries made within one shopping period as a single inquiry. In older FICO Score versions the period is any 14 days; in the newest versions it is any 45 days.
• VantageScore says it treats car loan inquiries made within a rolling 14 day window as one inquiry.

You cannot know which score or version a lender will use, so the safe plan is to do all your car loan applications within 14 days. FICO also says that for most people one extra inquiry takes fewer than five points off a FICO Score.

At the dealer

1. Agree on the price of the car first. Keep the loan out of the talk until the price is settled.
2. Then say you have financing, and ask whether they can beat it at the same term.
3. If they beat it, check that the contract shows the APR, term and amount financed you agreed to. A lower payment that comes from a longer term is not a better rate.
4. Do not drive the car home until the financing is final. If the dealer says the loan still needs approval, ask for that in writing. Some buyers get called back days later and told they must sign a new deal at a worse rate.

What to do next

1. Check your credit reports first. The lesson on credit and rates shows what to look for.
2. Ask your bank and at least one credit union for a car loan offer, within the same 14 days.
3. Write down each offer: amount, APR, term, payment and the date it runs out.
4. Settle the car price before you talk about financing, then ask the dealer to beat your best offer.
5. Compare the offers in the payment calculator.

Sources

• Consumer Financial Protection Bureau: Auto loans (opens in a new tab)
• FTC consumer advice: Financing or leasing a car (opens in a new tab)
• myFICO: Credit checks and inquiries (opens in a new tab)
• VantageScore: Shop around for a loan to find the best offer (opens in a new tab)
• MyCreditUnion.gov, from the National Credit Union Administration (opens in a new tab)