Why it helps to get an auto loan before you go to the dealer

by Holly Johnson
Why it helps to get an auto loan before you go to the dealer

Shopping for an automobile can be an exciting yet harrowing experience. It’s fun to drive off the lot with a new car, but the amount of money you need can be scary.

You can find numerous strategies to save money on a car loan on the web. You can try the good-cop-bad-cop method, for example, and you should always be willing to walk away if you don’t get the price you want. But there’s one strategy you can use that almost always helps you save — and that’s getting a car loan lined up before you hit the dealership.

If you’re buying a used car, you will almost always be better off lining up your own financing instead of relying on a dealership. Here are four reasons to apply for an auto loan before you shop for a new ride.

1. Shop around for a loan with the best rate & terms

If you apply for auto financing once you’ve selected a car at a dealership, you’re stuck picking from the lenders and loans the dealership offers. This often means choosing from a handful of lenders at most, and it could mean not having access to loans with the best rates and terms.

By shopping for an auto loan early, however, you can compare loans from several lenders to ensure you get the best deal. To save time and effort, you could shop for an auto loan on a website that offers multiple quotes and several offers in one place. With that information in front of you, you can compare loans in terms of their annual percentage rate, any fees they charge, your monthly payment and your repayment timeline.

Read more about the pros and cons of dealer financing.

2. Set a budget before you shop

Another major benefit of applying for a car loan before you head to the dealership is creating a realistic budget before you shop. It’s easy to be wowed by a car outside your price range if you don’t set a budget ahead of time. Having a preapproved loan offer for the amount you want to spend can keep you on track.

As you prepare to apply for an auto loan, figure out what you can afford. Look at your monthly budget, your expenses and your savings goals, then determine how much you can pay for a car each month without sacrificing other financial goals. In addition to your monthly payment, consider the costs of auto insurance, maintenance and repairs.

3. No haggling or dealership tricks

Many car salesmen focus on getting you to spend as much as possible, and they use your ideal monthly payment to push the limits. The problem is, many dealerships will extend your car loan up to 72 or even 84 months. This could leave you spending more than you planned.

Let’s say you want to spend $10,000 on a used car. You head to the dealership without a preapproved loan offer, and your sales guy asks you what monthly payment you can afford. You tell him $300 per month — the amount of your old car payment.

All of a sudden, the salesperson is showing you cars in the $20,000 range. Why? Because, if you took out a 72-month auto loan for $20,000, your monthly payment would only be $317.48 at 4.5% APR.

With a preapproved auto loan, you won’t fall victim to these tricky marketing techniques. You already know how much you can spend and how much you’ll pay each month, so you can shop for cars within your budget.

4. You can negotiate as a cash buyer

When you have the cash or a preapproved loan check, you can negotiate a cash sales price without getting caught in the minor details of auto dealership financing. This will make your negotiation less complex.

While it’s fine to shop at a dealership for cars in your price range before you know what you want, you should research prices on websites like Kelley Blue Book before you negotiate.

With a preapproved auto loan check or cash in hand, you can research average sales prices for the car you want to buy then make a take-it-or-leave-it offer. If the dealership doesn’t like your offer, you can head to another dealership and start again.

As a cash buyer with no need for financing through the dealership, you have the power. You already know what you can afford and you have a preapproved auto loan to prove it. With that leverage, you’re in the ideal spot to get the car you want for a price you can afford.

You can save big on your next auto loan by avoiding these two common mistakes.

Image: SDivin09