Car Loan Guide

The Most Comprehensive Guide to Saving Money on a Car Loan

Quick Start Guide

A car loan is the one area car buyers tend to get taken advantage of the most. Some car dealers make the bulk of their profits through financing - not the actual sale of the vehicle. Whenever you hear someone bragging about negotiating a killer price on a new car, chances are they got ripped off on the financing.

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Credit Score is Extremely Important

Getting a great deal on a car loan is easy if you have excellent credit. Thus, your credit score is the most important factor when it comes to saving money on a car loan. On a typical 60-month loan, a person with poor credit will pay up to $8,500 more than someone with good credit. It's important to maximize your credit score by checking and fixing any errors (studies have shown nearly 80% of credit reports have at least 1 error).

Credit scores range between 300 to 850. You need a credit score of at least 710 to qualify for the very best rates. If your credit score is below 640, it's considered sub-prime and you'll be paying a much higher rate of interest (over 10%). It becomes difficult to even qualify for a car loan if your score is below 550.

To learn more about your credit score, including how to improve it, check out the articles under the "Credit Scores & Reports" section to the right.

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Always Comparison Shop Your Car Loan

After making sure there are no errors in your credit report, the next best way to save money is to comparison shop your auto loan.

Many consumers assume they can only get a car loan through a dealership. This is a huge mistake! You should always have car financing arranged BEFORE going to a dealership.

First of all, you need to know how much money you can borrow before deciding which car to buy. If you have great credit, long-term employment, and a high monthly income, you shouldn't have any problems getting a large loan. But if you've had credit problems in the past, you'll likely be limited to a small loan. Whatever the case, you need to figure this out before going to a dealership.

Never rely solely on a dealer to arrange your auto financing - they don't have your best interest in mind and will likely arrange a loan that gives them the largest commission - not the best deal for you. If you arrange your own financing before going to a dealer, they will be forced to compete with your best rates - and that's exactly how you want it!

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If You Have Bad Credit or Negative Equity

Those with bad credit are at greatest risk of getting ripped off when it comes to car loans. Most are desperate to get a car and many dealers specialize in profiting from this type of customer.

Getting a loan with bad credit is difficult, especially in this economy. Most lenders will require you to have at least 2 years of steady employment and residence. They will also require you to come up with a large down payment.

The best way to get a loan with bad credit is to get a co-signer. This person agrees to make the car payments in case you fail to do so. This is usually a parent or close relative.

If you end up getting a car loan at a very high interest rate, you can always try refinancing in a year or two. Having made payments on time, your credit score should improve and qualify you for better rates.

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If you have negative equity (owing more than what your car is currently worth), the best thing to do is to simply keep making payments until the car is paid off.

If you really need a new car, you should pay off the negative equity whenever you sell or trade-in the car. If you don't have the cash to do so, you really shouldn't be looking to get a new car in the first place.

A big mistake is to "roll over" the negative equity into a new car loan. You'll just end up digging yourself into a deeper hole which will eventually lead to a default on payment and ruined credit.

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Common Car Loan Scams

Due to the confusing nature of auto financing, there are several scams you need to watch out for.

The most common is the "packed payment" scam. This is when a dealer increases your monthly car payment by including back-end products that you never agreed to - such as extended warranties and paint/fabric protection.

Here is a list of the top 7 car financing scams you need to watch out for.