For the vast majority of people looking to buy a new or used vehicle, auto loans are a necessity more than a choice. There's nothing wrong with that, after all, a vehicle is often the second most expensive purchase many people will make in their life, after a home. The problem is, too many of us spend too much time shopping for the car, and not enough time getting the best auto loans we can possibly get. But I'm going to spell out 11 tips that will save you money by helping you get the best auto loan for you.
Have you ever spent two hours or more in a car dealership going to and fro with the sales exec, trying to squeeze the very best deal out them you can? And if you have, did you finally walk away with an order form in your hand and a big smile on your face because you've got thousands of dollars off the price? If you have, then well done to you. Now ask yourself if you've ever done the same thing with the finance? Much of the time, I'm afraid, the answer will be no. In fact, by being smart and following my advice, you could save as much or more on your auto loans and auto finance as you do on the vehicle itself.
Tips we're going to cover include:
- How you look at an auto loan as part of a deal
- Online research
- Dealership finance
- Who you’re dealing with
- Playing the car against the finance and vice-versa
- Add-on products
- Be prepared to say yes
Change the way you think about auto loans
You need to look at the whole car buying process in a slightly different way from the way you have done in the past. Many dealers will try to sell you a "package" as this is a way they can maximize their income by presenting the customer with a single, affordable monthly payment. They will have already established your budget in the early part of the sales process, so they know that if they present you with a payment that's towards the top end of your budget there's a good chance you'll agree. The problem is that even if it's affordable for you there's probably stuff in there you may not need, and even if there isn’t, you can probably still do better.
Think about the vehicle as one product you are buying and the finance agreement as a separate product in its own right. Work on the deal for the car first, including the price for any trade-in you might have. Once you've settled on a price to change your vehicle for the one you want to buy, then move on to the finance.
Remember to do your online research before doing a deal
Before you go to buy a car, van, truck or SUV, you're going to do a lot of online research to help decide which vehicle, powertrain and trim level is right you, correct? You should also be doing exactly the same thing with finance packages before you go anywhere near a dealership. There's almost as much to research on finance these days as there is with the vehicles themselves.
You could be looking for a straightforward loan, in which case, the research is all about rates, whether your credit rating would allow you access to those best rates, and whether it's an unsecured personal loan or an auto finance agreement secured on the vehicle. On the other hand, you could be looking for an agreement with a balloon payment to get lower monthly payments. If you are, different lenders may set different balloon payments as well as different rates. At the moment, leasing is increasingly popular, so research will be finding the lowest monthly payments, whether they have access to the model you want, and a number of other criteria we'll cover in a separate article about leasing specifically.
There are even subscription options now that can include the vehicle, servicing, maintenance, and insurance. They are reasonably rare at the moment, but they are becoming increasingly prevalent as dealers and manufacturers look for new ways to attract business. Some of these are offered by dealers and others are being run by the manufacturers.
Don't rule out the dealer's finance
You've done your research, you know what type of finance you want, and how much it should cost you, but don’t go into the dealership with a closed mind, and never go to buy a car with your finance product already agreed and committed to elsewhere. Although the very best finance the dealership can offer may not be as good as some you've found elsewhere, telling the dealer you’re not going to be taking their finance under any circumstances removes a large part of your bargaining power.
It doesn’t matter if you're shopping for a brand new or a used vehicle, the finance might be more important to the dealership than the vehicle itself. Especially in the current climate, where there's more new vehicle production capacity than demand around the globe, there may be little or no margin left in the vehicle after you've secured a great deal for the dealer to make a profit. That just leaves the finance and the add-ons.
Right from the moment you walk into the dealership, the main focus of the sales exec may be to secure a finance deal, and the vehicle may just be, well, a vehicle for selling finance. If you say from the beginning that you've got no intention of taking their finance whatsoever, and especially that you've already secured and committed to finance from elsewhere, the dealer then has to concentrate on making money out of the car you’re looking to buy. The result could then be a more expensive purchase than you might have gone away with than if you played along, and let them know that you were open to the idea of taking their finance.
Know who you’re dealing with
Much of the time, and especially if you’re shopping at a large main dealership franchise, the sales executive you deal with isn’t going to be the person making the decisions. A senior sales exec may have a little latitude to make a deal, but it will only be from the full asking price to a minor amount of discount they have been told they have to play with before they go to ask permission.
When discussing the deal on the vehicle you’re looking to buy, and your trade-in value, the sales exec will more than likely have to go to the sales manager to give more away than they can themselves. That's fine, it completely routine and how these things work. But if you've followed my advice so far, and you've kept the finance separate from the vehicle, it may well be someone called a "business manager" or something similar who deals specifically with the finance.
If the business manager is away or busy, the sales manager might handle the vehicle and finance. However, the thing to remember is not to be daunted by the idea of going to see the business manager. Instead, look at it as an opportunity to save even more money. The finance specialist probably couldn't care less about what you are paying for the car you’re buying or how much you’re getting for your trade-in. They earn their money selling finance and some add-on insurance products, so they are going to try and get you to buy some of those add-ons and to get you into as high a rate for the finance as they can.
Alarm bells might be ringing with you now, and you could be asking "why are you telling me to buy finance from someone whose sole aim is to get as high a rate as possible?" Remember I said they don’t care about the vehicle or your trade in? The opportunity for you here is that if you don’t take their finance or any of the insurance products, they don’t earn a commission. Worse than that, if a vehicle is sold that isn’t on finance, it could actually cost the business manager money.
It depends on the way they get paid, but a key parameter in finance selling is penetration. Just as consumers tend to get a better price if they buy more of a product, a finance professional may get a higher percentage of the finance commission pot they earn for the dealership if they achieve a higher finance penetration rate.
For example, let's say a dealership sells 100 vehicles in a month and earns $50,000 in finance commission. If 50% of those vehicles have been sold with the dealer's finance, the business manager may get 5% commission. However, if 60% of them were on finance, the commission rate may go up to 7.5% on the same $50k pot. Do you see? If 50 vehicles with finance on them get the finance specialist $2,500 in their pay packet, if 60 vehicles out of the 100 sold had finance, but the pot was still only $50k, the commission in the pay packet would be $3,750, or $1,250 more.
Think about it for a moment. If you are buying the 100th vehicle, and so far, of the 99 already sold 59 of them are finance and the dealership finance commission pot is at $50k, what happens to the finance manager's pay if your vehicle isn’t on the dealership's finance? Your vehicle leaves the penetration at 59%, which is one vehicle short of triggering the higher commission rate, and that stops the business manager from earning their higher 7.5% commission rate and an additional $1,250.
In this case, they will do your finance at the lowest rate they have to offer, and in some cases, they may even be willing to lose on your deal and subsidize your finance to secure the additional penetration. After all, wouldn't you give up a couple of hundred dollars to earn an extra $1,000 in commission? Ok, the dealership going as far as losing money on the finance isn't going to happen every day, but it does happen, and I know I've done it on more than one occasion in the past.
Obviously, you don’t have this opportunity when you are buying your finance online before getting a new car. In that case, the company you’re dealing with only has one income stream; the finance. Likewise, if you go into the dealership with no interest in their finance, they can only make their money in the car.
It also works both ways
I've just told you how a dealership might actually lose money to get an extra finance deal over the line, but the same thing can apply in reverse with the vehicle itself. Different people in the dealership have different priorities, and the sales manager could be in a similar situation with the sale of an extra vehicle as the business manager is with the sale of an extra finance deal.
A sales manager may get a higher commission rate if the number of vehicles sold for the month goes over a certain number. To get there, the sales manager might be prepared to sell the vehicle without a profit or even at a loss in some cases, if it gets them over the mark and into a higher commission band. If you play hard to get, the sales manager might put pressure on the business manager to drop the finance rate as well as selling you the car at cost or lower. These are extreme examples, but they do happen. And even if you don’t get to that point, I hope you now understand how playing this sort of game will always get you a better deal
One word of caution though. Use some judgment and common sense, and don’t try to push it too far. If you've done your research and you have a good idea of what the best possible deals around are at the time, don’t try and go beyond that. It could work, of course, but you’re more likely to get the sale team's backs up and miss out.
Don’t be taken in by what seems like a great deal on an insurance product unless it's a product you actually want. Take something like Guaranteed Asset Protection or GAP insurance as it's usually called. Listen to what it is and what it does, or better still, read up on it as part of your research. I'll say it's actually a very worthwhile product, but if you look it up beforehand and decide not to go for it, don’t be tempted by a big discount.
If you’re offered it by the dealer for $750 when it's normally $1,000, that might be a good deal but it's still $750 too much if you didn’t want it in the first place. Anyway, GAP is a product like any other that suppliers buy and sell at a profit, and you still have at least a few weeks to change your mind and buy it from the dealership or online after you've taken delivery of your new vehicle.
Be prepared to commit, most of the time
As a rough guide, the best deal you are offered when you are there at a dealership negotiating on the day will be the best deal they are going to offer you. If you go away to "think about it," things happen when you are not there anymore. You might have been offered a deal based on being the customer that took the finance penetration for the business manager to the next level. If you walk away without signing, someone else could take your place, and when you go back a day later your deal might not be as important as it was and they might not stand on the deal you were offered on the day.
You'd be amazed how many times in my career I've told a buyer that the deal they are being offered right now is the best it's going to get. And you know what? They haven’t believed me. When they come back a couple of days later and the deal they are then offered isn't anywhere near as favorable as it was, they can't believe it. They rarely say it, but what they mean is they thought I was being economical with the truth the other day and was just trying to pressure them. Yes, I was applying pressure, but for my own reasons; genuine reasons. And those reasons of mine were benefitting them too. Please do me a favor, will you? Don’t be that customer who assumes the sales exec, sales manager or business manager is a lying crook, because they very rarely are these days, and it might cost you the chance of a great deal on your auto loan and your vehicle.