Shop for the Loan Before Shopping for the Car

Since the majority of new and used cars are financed, comparison-shopping for the best finance terms and contract is worth the time and effort and can save you a lot of money.

A lot of people assume the worst and don't even try to get a car loan at a more favorable interest rate. Some consumers knowingly choose to pay high interest rates for several reasons. Buyers with a checkered credit history may be embarrassed to go to a bank or credit union. They fear being turned down. However, the majority of borrowers who think their credit is poor could qualify for regular loans. Some consumers disregard their own self-interest in money matters. They value convenience and the promised "no fuss" policies of dealerships.

If you want to get a good deal, you must investigate all the sources of financing and select the deal that best meets your needs. Before signing any finance contract, for your own protection, read it carefully. Make sure you understand every clause of the contract. Also, be sure there are no blank spaces or lines to be filled in later. Do not be afraid to ask questions about clauses that are unclear. You also want to know the creditor's legal rights for situations such as late payment, default or prepayment. Finally, be sure that you can meet your responsibilities defined in the contract.

Banks. When shopping for auto loans, be sure to swing by your bank. There is a broad trend among banks to take care of their customers regardless of their credit standing. So if you have a checking or savings account at a bank, you are a customer and the bank will try its best to serve you and keep you as a customer.

A larger bank may have a whole department devoted to lending to people with flawed credit or they may have a relationship with a company specializing in sub-prime lending.

Smaller banks are more apt to approve loans to folks with credit woes on a case-by-case basis. The more accounts you have at the bank the better the chance they'll be willing to work with you.

Meet the loan officer face to face. It's a good idea to apply for an auto loan in person. Work up your courage and look the loan officer in the eye. Be upfront about the problems you've had in the past. Did a divorce, illness or accident throw you off track? If bills you paid 30 days late while you were between jobs caused that "glitch" in your credit, tell the loan officer. Let them hear the reasons for your low score credit rating in your own words.

Credit Unions usually offer low loan rates, especially for used cars. When it comes to auto financing, credit unions have had a reputation of delivering low-interest rate loans to members with good credit. But that's beginning to change. While some credit unions still have an all-or-nothing approach to financing-you either qualify for a low-interest rate loan or you don't'-others are offering a range of rates. This tiered approach to loan pricing allows credit unions to offer loans to members with all levels of credit.

In addition, your car payment can be deducted from your payroll check. Credit unions sometimes offer free credit insurance to borrowers as well as low-cost credit disability insurance. Many consumers join a credit union where they work just to participate in their loan programs.

Getting a loan online. The Internet has definitely changed the face of auto loan lending. With the abundance of online lenders, many car buyers are going no further than the comfort of their own homes to shop for auto financing. There are thousands of lenders available online. Because there is so much competition, the Internet generally offers the best car loan rates around. There are also lenders out there for every type of borrower. Online lending is not limited to those with excellent credit. Be sure to shop several websites and compare based on all of the terms of the loan, not just the rate.

Dealerships are not lending institutions. They borrow the money from their own banks or from local institutions. They may be the most expensive source of car financing but also the most convenient.

Dealers offer financing typically through the finance subsidiary of the automaker. For example, a GM dealer will likely direct you to the General Motors Acceptance Corporation (GMAC) while a Ford dealer will likely suggest Ford Credit. The interest rates that are charged by these finance companies are normally higher than the interest rates that are offered at the local banks or credit unions. However, for many car buyers, this may be the only credit source they have available depending on their credit.

Dealers make a lot of their money on financing. They have deals with lenders, often arranged so that the higher interest rate you pay, the more money the dealer makes. It's what they call their "back-end' business and it is highly profitable.

If you have a few bad marks on your credit report, you can usually still obtain dealer financing but it is typically at a much higher interest rate. They're in the business of selling cars, and if they can't get you financing, they're losing a sale.

Car dealerships know this and most dealerships work with a few sub-prime lenders in order to help car buyers with less than perfect credit obtain an auto loan. This means that even if your credit is less than ideal, you can get the financing you need for the vehicle you want, although it will usually be at a higher interest rate.

Car buying service for people with special finance needs. These website businesses advertise that they are not a direct lender and do not refinance or assist with purchases from private parties or non-affiliated stores. All applications are processed throughout their extensive network of leading area car retailers and their sub-prime financing companies.

This is very similar to financing a car through a local dealership and the same cautions apply.

Finance Companies and small loan companies make a point of providing loans to persons with bad credit or no credit history, but they charge the highest legal interest rates and have exacting requirements for loan security or collateral.

Family. Your family may be a good source of financing for automobiles. Wouldn't you rather pay the bank of Mom instead of a bank? The only problem is that it does not establish credit for you, or re-establish bad credit. And personal loans often cause hard feelings and even destroy relationships so write out a contract, sign papers and pay back the money on time!

If you are looking to establish credit, just use family money as a 20% down payment and finance the auto loan in your name.

Buy here/pay here car lots. If there's one lender to avoid when you're trying to get the best auto loan rates possible, it's the "buy here/pay here" car lots. Unless you absolutely cannot get a car loan anywhere else, this type of financing should be avoided like the plague.

Find out what the maximum interest rate is that these dealers are allowed to charge by law and chances are that's what their rates will be set at. When it comes to locking in the best auto loan rates, this type of financing isn't even a contender. It is not unusual to pay 18% interest for a car loan from one of these dealers. Over the life of the loan, this adds up to thousands in additional payments.

Applying for financing before you start car shopping will help you narrow your auto search. Finding out how big a loan you qualify for and at what rate can help you determine what kind of car you can realistically afford. With your financing already pre-approved you are not dependant on the financing that the car dealer offers but you can truly compare their rates with what is available elsewhere.