Reduce the cost of your next auto loan

Know your interest rate.

You should know your interest rate before you step foot in the dealership. Most people don't know that dealerships do not always shop for the best rate. They will often go with the lender that is offering promotions or lenders that they "owe" something to (they may have helped the dealership out on a previous deal). You can visit websites like www.bankrate.com to determine the national averages for interest rates. Based on your personal situation/credit score, you should have an idea of what interest rate to expect.

Dealers also have the ability to "mark up" your interest rate and share the additional interest rate you pay with the bank. You can frequently save 10% easily by making sure your rate is not marked up. Say you have a $20,000 loan at 10% for 60 months. Your payment would be $425 or a total amount of $25,500 over the life of the loan. However, if the dealership "marks up" the rate to 13%, your payment would now be $455 or a total of $27,300 ($1,800 difference over the life of the loan).

Secure a financing option before you begin negotiations.

There are many websites that will shop lenders for you and will typically provide you with the most competitive rates available. You will find several options just by typing "auto loans" in a search engine. There are generic shopping sites like www.lendingtree.com, but many major banks like Chase and Capital One offer "blank check" programs that approve you for a loan amount and send a blank check to your home. You can then shop for a car and negotiate like a customer who is paying CASH. This puts you in a position of strength with the dealership. Also, don't be afraid to shop on line for a loan if you don't have perfect credit. Most on line lenders have programs for non-prime customers.

If you have an account with a local bank or credit union check with them and see what kind of rate you can get through them. Often, they want to keep all of your business with them and will be very competitive (especially if you have some dents or dings on your credit).

Don't tell the dealer what payment you are looking for.

If you have followed the advice above and have your own financing then you will be shopping and negotiating on price - not payment. If the dealer is securing your financing, NEVER, NEVER, tell them what your target payment is. Once you do this you have lost. They will find a vehicle that they can maximize their profit by selling it to you slightly above your target payment (they know you won't pass up the opportunity to buy a car today for an extra $10 - $50 per month, but that translates into $600 - $3,000 extra cost to YOU over the life of the loan). This allows the dealer to sell you a lower value car at a higher price and possibly make money on the financing by marking up your rate.

This can be avoided if you are negotiating on the price of the car like a cash customer. You can start with what they are asking for the vehicle and go from there. This takes away the dealerships opportunity to do things like "creative financing" where they change numbers around but convince you that your payment is still where you want it.

Avoid dealership add-ons.

The dealership also makes a great deal of money selling things like Credit Life, Accident & Health, Warranties and various other products. If you have life insurance and health insurance through work or other sources, skip the Credit Life and Accident & Health.

A vehicle warranty is a personal preference, but you definitely come out better setting up a savings account for vehicle maintenance and funding that each month in lieu of buying a warranty. Let's say a warranty cost $2,000 - not bad right? Well, once you finance that $2,000 over the life of your loan (ex 60 months @ 13% or $45.50 per month) you actually end up paying $2,730 for the warranty. Still doesn't sound that bad for peace of mind? If you put that same $45.50 per month away for just 12 months - not the full 60 - you would have $546 in your vehicle maintenance account and $1,092 after just 2 years. Most vehicle repairs do not cost more than $1,000 and you can keep saving it over the course of the loan if you would like REAL peace of mind. The great news is, if you don't use the kitty for maintenance, you now have a source of funding for your next down payment. Also, warranties that you purchase run concurrent with the manufacturers warranty so you are double covered for a period of time.

GAP coverage is another coverage that most people do not need. If you are trading a car with zero or positive equity, you have a cash down payment and/or you have done a good job negotiating, you should be in a positive equity position on your new purchase. The one exception to this is situations where you are trading a vehicle with "negative" equity and rolling that in to your new purchase. In cases like this, you should strongly consider GAP coverage. You can typically buy this coverage for $500 - $700 at the time of purchase. This coverage pays the difference from your loan balance and the vehicle's value if your vehicle is totaled in an accident or stolen.

People often spend hours or days researching the type of car and finding the best price for their new purchase but they will walk into a finance manager's office blind. Knowledge is power, and in this case...it can save you MONEY!!