7 Things To Know When Negotiating Your Next Auto Loan

Are you in the market for a new ride? Finding a vehicle that meets your needs is the easy part. Financing it is another story, particularly if you’re unfamiliar with the process or have less than perfect credit.

To illustrate, I want to share the story of an acquaintance who got the shorter end of the stick on her most recent car purchase using in-house or dealer financing. We’ll call her Jesse. For a year or so, Jesse dreamed of purchasing a mid-sized SUV that would enable her to get more efficient gas mileage. One day, she saw a television ad for 1.99 percent financing for qualified buyers. She immediately headed to the dealership, test drove the vehicle and was out the door within a few hours.

But there was one major issue: Jesse failed to read the fine print and got stuck with a 12.99 percent interest rate due to a tarnished credit history. Had she done her homework, Jesse may have secured a lower interest rate and saved a bundle. Bummer.

Don’t be like Jesse. Here are some things to keep in mind when negotiating your next auto loan:

1. It pays to be prepared.
Use a financing calculator to determine how much you can realistically afford before commencing your search. Stick to your guns and try to stay under budget when exploring your options. (Quick note: don’t forget about the tax, tag and title fees that will also accompany the purchase). And don’t let the car salesman trick you into adding a ton of extras, like extended warranties, alarm systems and window tint, to the “financing package”. In most instances, these items are much cheaper if purchased through an independent provider.

2. The higher your credit score, the lower the interest rate.
Visit AnnualCreditReport.com to retrieve a free copy of your credit report before applying for a loan. If you spot any inaccuracies, immediately file a dispute. Reasoning: the contents of your credit report determine your FICO score, which is the three-digit figure the lender will use to determine your creditworthiness. Next, use a free credit monitoring service, like Credit Karma, Credit Sesame or Credit.com, to view your credit score. The higher the figure, the lower the rate you’ll qualify for. These simple actions could save you hundreds, if not thousands,on your next auto loan.

3. A down payment will soften the blow to your wallet.
It may not be necessary to make a down payment to secure the auto loan. However, going this route just means you’ll end up paying more on the back end. A better idea: allocate any funds that you can to the down payment to minimize the amount you’ll be financing.

4. Look beyond the monthly payment.
Car salesmen are experts at playing on their customer’s emotions. In other words, they will encourage you to test drive the car with all the bells and whistles and sell you on the, “low monthly payment”. But don’t fall for this deceptive tactic. Remember to stick to the original game plan and focus on the total amount you’ll be paying for the car, and not the monthly payment. You wallet will thank you in the long-run, and you won’t find yourself with an upside loan two years in if you want to sell the car.

5. The longer the loan term, the more you will pay.
This goes hand-in-hand with the last point. If you really want that new Land Rover but can only realistically afford a Honda Pilot, the car salesman may suggest that you extend the loan term. That way, your monthly payment will be much lower. But there are a few problems with this scenario. For starters, a longer loan term just means you’ll pay more in interest over the life of the loan. Furthermore, if getting a Land Rover means you’ll be paying for it for the next seven years, you probably can’t actually afford it. Therefore, it’s best to go with a cheaper option or walk away.

6. The local credit union may have a lower interest rate.
Don’t be afraid to shop around for more competitive financing terms. The dealer will try to deter you from doing so, but ignoring their advice could reduce the amount paid over the life of the loan if you can find a lower rate elsewhere. And don’t worry about your credit score taking a hit due to excessive inquiries. ”If you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping, notes myFICO.

7. You should negotiate the value of your trade-in.
This is a must if you still owe on the car. And if the dealership offers less than what you still owe, they’ll roll the deficit into the new loan. In other words, you’ll be paying interest on the trade for the duration of the new loan.

A Final Thought

Perhaps this entire auto loan thing isn’t quite working out and you’re thinking about throwing in the towel. Maybe you’ve been hit with a series of rejections because you have less than perfect credit. Or maybe you were approved by both the dealership and local credit union but the interest rate is astronomical.

It’s not the end of the world. Step away from the situation and breathe. The good news is credit can be restored with a dose of persistence and hard work. And once you’ve done your part, everything else will fall in line and you’ll be able to drive off the lot in your dream ride. Best of all, the auto loan won’t leave you dealing with buyer’s remorse when it’s time to make the monthly loan payment.

What big questions do YOU have about buying a new car? Share them here!

About the author

Allison Martin

Allison Martin is a digital content strategist and personal finance junkie. Her work has appeared on on a number of reputable sites, including The Wall Street Journal, Investopedia, Daily Finance, MSN Money and Credit.com. She also travels around the nation facilitating financial literacy workshops for nonprofits, governmental organizations, colleges and universities.


  • A Service contract is worth its weight in gold if you purchase a used Chrysler, Ford, Chevrolet etc. service contract on your used Chrysler Ford or Chevrolet that you purchased from the same name new car dealer. I have found from personal experience that some “non factory aftermarket” warranties are headaches. They have many ways to “fine print” disqualify your claim.

  • if you plan on buying your leased car at the end of the lease, remember you will be paying retail twice…never a bargain. ALWAYS ALWAYS ALWAYS buy a service contract if you are buying a used vehicle…get one that covers computer controls, power train, and bearings…if you think it’s expensive, ask yourself what peace of mind is worth. If you are putting yourself out there to afford the payment, you probably won’t be able to afford an expensive repair. My personal experience is I have always had a service contract pay for itself, and my professional experience is…you don’t want to be the person yelling at the service writer that your broken car is too expensive to fix when you were offered a service contract that would have limited your out of pocket expense to $100, and you were too cheap to buy it and turned it down. My current service contract cost $2500 rolled into the loan, and they have already paid out $4000…with 6 months left on the contract. Buy your car in the evening of the last day of the month, or the morning of the first day of the month to save big bucks…that’s when the sales incentives/quotas matter most and they will do anything to sell you a car. This information is based on a 25 year career in the auto industry.

  • You’re right Allison,
    Jesse overlooked a major factor. She did not have a qualifying credit score to be approved at the adverised 1.99% special rate, and I”m sure that was spelled out in the advertisement. So please don’t use derogatory terms as “tricked”, or say she got,”stuck” with 12.99%. Jesse had the right to refuse the rate. Jesse could,have negotiated or walked out. You shouldn’t villify an entire industry. No one “held a gun” to Jesse’s head. I’m sure that there are people in your industry of personal financial planners that may not always have their clients best interest at heart, and don’t they always offer added products that they encourage you to buy or invest in? Other than those remarks, your article has merit and encourages the use of common sense.

    • Joseph,
      You are 100% correct; however, unless the author uses gross hyperbole and wild accusations to cover their own embarrassment no one will pay attention. Caveat Emptor!

    • I am looking to lease a car but I am new at this so I don’t have a lot of information on how it works can you splain it a little bit more…

      • Leasing is like renting. The details are extensive and can fill a book but it can be simplified.
        Simple example: The value of the vehicle is $40,000. The leasing company (bank) figures the vehicle will be worth about 50% of that value in 3 years. they take the other 50%, divide it into the 3 year term, add interest (money factor) and tax, and you have your payment. This is a simplistic example but you get the general idea. Just remember to negotiate the payment, it’s not written in stone. The dealer will try to get as much as possible and will drop it if you press hard. I recently negotiated a BMW lease and ended up with a payment that was $60.00 month lower than the initial payment I was given and nothing changed but the dealer’s willingness to negotiate.


        • One thing no finance expert ? Ever mentions about leases is that the total of the 3 year lease cost is figured and you are charged interest on it all as if it was to pay for something delivered at the beginning of the contract you have with them, In other words you pay 36 months interest on services provided (a leased car) as if you received the total value sold to you at once and Not spread out incromatically for the 36 month lease or 365 X 3 cars All for one day at the same time for one day ? !!! and then you were charged interest over a 36 month time period for what you got for one day to stage the World’s biggest car chase movie Scean. In other words you were charged interest on the whole lease for the whole 36 months but only provided with a car incrementally one day at a time during that lease !! and limited the number of miles you could use it on top of that.

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