If the dealership is arranging the financing, be fully aware that the dealership often makes a profit on the financing. In some cases the Dealership will mark-up the interest rate (or "APR") and is under no obligation to tell you. The higher the APR that you agree to, the more money they receive from the finance company for arranging the car loan.
If your credit is excellent or good, you have direct and easy access to competitive rate quotes. It is a good idea to know what APR your bank, credit union, or current lender will offer for comparison purposes.
If your credit is less than perfect, your access to a competitive process is restricted.
In either case, you need to know the APR, the amount financed, the monthly payment and the number of months. Ask if there are any other charges included in the monthly payment such as “credit/life/disability insurance” (generally you do not want this or you want to evaluate it separately). Also, you can call your local bank branch manager and ask if the stated APR, amount financed, number of months and monthly payment all add up! You can also use payment calculators readily available on the internet (such as at Edmunds.com). If it doesn’t add-up, find out why.
Financing can be one of the most challenging aspects of purchasing a vehicle, particularly if you have “less than perfect credit”. Most important:
If you believe your APR is too high and you are having a difficult time getting a better deal from the competition, does it make financial sense to defer your vehicle purchase for 6 months? Use the money you save to reduce your debts, save a larger down payment, and take this time to improve your credit score.
If you are considering financing arranged by the dealership: Ask the dealership for a copy of the loan agreement that you can take with you and read at your leisure.
Read it over carefully. The loan should be “simple interest” and there should be no “prepayment penalty”. Ask the dealership to point these terms out in the loan agreement. You may wish to have your banker or a trusted friend look it over. Avoid contracts with “pre-computed interest” or that mention “interest rebates” and “rule of 78s”.
Very important: Have you received approval on your loan?
Under no circumstances should you commit to a purchase and take delivery of the vehicle unless you have received unconditional loan approval. To avoid any misunderstandings, you should get the loan approval in writing. Final loan approval may take 24 hours, be patient. If you commit to purchasing the vehicle and your financing falls through, you place yourself in a poor negotiating position. You may not like your financing alternatives, especially if you have less than perfect credit.