Auto Financing for Smart People: Tips for Saving on Your Car Loan

One of the biggest mistakes people make when buying a new car is forgetting to include the cost of auto financing in the total price.

For example, if you’re buying a new Honda Civic, the difference between “sticker price” and the dealer’s invoice price (what the dealer paid for the car) is about $1,500. If you negotiate well, you could save $1,000 or more on the price of the car.

Check Your Credit Report

Your credit score and your income will determine how much you qualify to borrow — and at what interest rate.

So definitely don’t apply for an auto loan without checking your credit report first. If there are any errors or incorrect information on your report, such as fraudulent activity, you could be turned down for a loan or offered only a very high interest rate.

How to Choose the Best Car Loan for You?

Dealer financing

There are three common routes you can take when getting your car loan financed by a dealer.

  • Dealer-arranged financing
  • Captive finance companies
  • “Buy-here, pay-here” financing

What You’ll Need to Qualify

You will need the following information to apply for a car loan:

  • Full name and proof of identification
  • Address and a recent utility bill
  • Employment history and monthly gross income
  • A list of assets and expenses
  • Signed authorization for the lender to obtain your credit report
  • Car details, if you have them (year, make, model, etc.)

Shop the total loan amount, not the monthly payment.

The only time you should consider the monthly payment is when you privately calculate how much you want to spend for your car. After that, don’t discuss monthly payments. Some lenders may focus on the payments to induce you to borrow more money by extending the number of months you pay. That way they make more in interest, and you have to drive your aging car longer.

Figure Out How Much You Can Afford

Start by assessing your monthly income and expenses. It's especially important to consider your debt payments, such as mortgage payments, student loan payments and credit card payments. Lenders will look at the ratio of your total monthly debt obligations to your total monthly income when deciding whether to approve you for an auto loan.