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Shopping for your auto loan

Shopping for loans and trying to get the best rates and other terms, while complicated, is like other types of comparison shopping. Shopping ahead of time will get you ready for negotiating your auto loan and make the process less stressful.

Prepare before you apply for an auto loan

You will be in a better position to shop and bargain for an auto loan if you follow these steps before you apply for a loan.

Check your credit report

The information in your credit report determines your credit scores. Your credit score plays a large part in determining what kind of auto loan you can get, and how much interest you will pay for the loan. Here are some helpful resources:

Do you need a co-signer?

A co-signer is a person – such as a parent, family member, or friend – who is contractually obligated to pay back the loan just as you are. If your credit history is limited or needs improvement, and you have a low credit score (or no credit score), your interest rate could be significantly lower if you have a co-signer with good or excellent credit. That is because the lender will rely on the co-signer’s credit history and score in deciding to make the loan.

If you are considering having a co-signer, you and the potential co-signer should think carefully about this decision. If you do not repay your loan, you and your co-signer will be responsible for repayment. The co-signer is responsible for the loan even though he or she has no right to possession of the vehicle. In addition, any late payments made on the loan would affect both your credit record and score and your co-signer’s credit record and score. Federal law generally prohibits a lender from requiring you to have a co-signer if you apply for a loan individually and you qualify under the lender’s standards for creditworthiness for the loan. For more information on co-signing visit consumerfinance.gov/ask-cfpb/why-might-i-need-a-co-signer-in-order-to-get-vehicle-financing-en-811.

Check current auto loan interest rates

You can research rates by contacting several banks, credit unions, or other lenders. You can also look online at many commercial sites which may give you an estimate of interest rates nationwide and by your zip code. Some commercial sites will link you to specific lenders and dealers for estimates, so you may want to be careful about entering your personal information.

Consider a down payment

A down payment will reduce the total amount that you finance because you will have to borrow less money. The larger the down payment, the lower the total cost of the loan.

Decide if you want to trade in your current vehicle

If you already own a vehicle, research its value to see how much you might get from a trade-in or private sale. You can look up the approximate value using online commercial websites such as Consumer Reports, Edmunds, Kelley Blue Book, NADA Guides, and online classifieds. These resources may also be available at your local library. Finding examples of similar vehicles that have sold recently in your area will help you know a fair price.

Once you know approximately how much your current vehicle is worth, you can decide whether to trade it in or sell it yourself. If you trade it in at a dealership, you and the dealer will decide on the value that will be credited towards the purchase price of your next vehicle. If you sell it yourself, you can use the money you get as a down payment.

If you have an existing auto loan on your trade-in, consider your situation carefully

Carefully consider whether to take on new debt in addition to your existing debt. Here are some considerations and steps:

  • Get the payoff amount, which is the amount to pay off the existing loan, from your current lender before going to the dealership.
  • Decide if you are going to pay off your existing loan now, wait until you pay off your old auto loan before you borrow for another vehicle, or include the amount that you still owe on your current vehicle in your new auto loan.
  • If you owe more on your current vehicle than it is worth — referred to as being upside down — then you have negative equity. If you roll the balance of your existing auto loan into your new auto loan, this could make the new auto loan much more expensive. Your total loan cost will be higher because you will be borrowing more than just the price of your new vehicle.
  • After you research your trade-in’s value, if the amount you still owe on your trade-in is less than it is worth, make sure during any negotiations that you consider whether you are getting fair value for your trade-in and you are able to fully pay off the old auto loan.

Do you still owe money on your trade-in?

If you are considering rolling the balance of the old loan into your new loan, make sure you understand how this will affect the total cost of your new loan. Carefully look at the total cost of the new loan including the amount borrowed, the annual percentage rate (APR), the interest rate, the loan term (in months), and the monthly payment – before you agree to anything. If you don’t roll the amount you still owe on your old vehicle into the new loan, and keep your current vehicle while buying a new one, then you will have two loans and two monthly payments to make. Either way, you may want to consider whether it makes sense to go through with the transaction and purchase the next vehicle if you still owe money on your trade-in. For more information, visit consumerfinance.gov/ask-cfpb/i-owe-more-on-my-current-loan-than-my-current-vehicle-is-worth-what-do-i-need-to-know-if-i-buy-a-new-vehicle-en-779.

Think about optional add-ons ahead of time

When you go to an auto dealer, you will likely be offered add-on products and services for the vehicle or for the loan. It’s a good idea to think about these add-ons ahead of time, so that you have less to worry about at the dealership, and have your answers ready when you are asked to buy these extras. Common add-ons include:

These products and services, which you may finance, are optional. If you buy them the price is negotiable. If you think you want to buy these products or services, shop around. For example, your own auto insurance company may offer GAP insurance, credit insurance, or other alternatives. If you finance optional add-ons as part of your loan, the amount you borrow and pay will increase.

Now that you’ve done your homework, you’re ready to take the next step: shopping for your auto loan. Use the auto loan worksheet to keep track of the loan terms and compare your choices. Take the worksheet with you to the bank, credit union, other lender, and dealership so you can compare your loan choices and get the best deal for you.

Shop for an auto loan

Now you are ready to start shopping for a loan. Before you head to the dealership, gather your personal information and consider getting preapproved for a loan.

Shopping ahead of time will get you ready for negotiating your auto loan and make the process less stressful.

Gather your personal information

When you’re heading over to a bank, credit union, or dealership make sure to gather all the information you will need. Lenders will generally ask for this information in a loan application:

  • Name
  • Social Security Number or ITIN
  • Date of birth
  • Current and previous address(es) and length of stay
  • Current and previous employer(s) and length of employment
  • Occupation
  • Sources of income
  • Total gross monthly income
  • Financial information on current credit accounts, including other debts

Get preapproved for a loan

Getting a preapproved loan offer or quote with a maximum loan amount and rate from a bank, credit union, or other lender is a good place to start. If you bring a loan quote from a lender to the dealer, you may be in a stronger bargaining position to get a better deal, whether you stick with the offer you brought in or you decide to accept the dealer’s financing offer.

Preapproval also helps you stay within your budget and allows you to compare interest rates without the time pressure you may feel once you are at the dealership. Then at the dealership you can focus more on the actual price of the vehicle and your trade-in because you will already know about the loan terms that you could get. You will still have the choice to negotiate a better loan at the dealership and not use your preapproval.

If your application is preapproved, the lender will give you documents to take to the dealership. Once you are ready to buy, the dealer will make final arrangements with your lender.

Understand how shopping for a loan impacts your credit score

Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Depending on the credit scoring model used, generally any requests or inquiries by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry. This means shopping around for an auto loan during that time span will count the same as applying for just one loan. You can minimize any negative impact on your credit score by doing all your rate shopping in a short amount of time.

Know your rights

A lender cannot discourage or deny your application for credit, or offer different prices or other terms and conditions of the loan, based on your race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, or good faith exercise of any right under the Consumer Credit Protection Act.

You can submit a complaint online with the Federal Trade Commission (FTC) at reportfraud.ftc.gov or with the Consumer Financial Protection Bureau (CFPB) at consumerfinance.gov/complaint or by calling toll-free at 1-855-411-CFPB (2372).