Shopping For Preapproved Loans

Start out by seeing what's available in your area. Loans you get from a bank almost always will be cheaper because dealers are getting their loans from a bank as well--then adding their own markup. Bankrate.com, an online source for financial rate information, allows you to find the best rates in your state or metropolitan area.

For instance, a recent check of the Tampa, Fla., area showed Sunshine State Federal Savings and Loan offering a 5.25% rate on a 48-month loan, while AmSouth Bank's rate for the same loan was 10.2%. These rates are specific to new cars: The rates for used cars will generally be much higher. Call to double-check the best rates you get from such searches. Be sure any rate quoted is an annual percentage rate, or APR. The APR adjusts for origination or other fees included with the loan--which different rate quotes may not do--and measures the net effective cost of borrowing. If you have top credit (a score of 760 or above), you could get a rate of near 5% with online lenders such as Capital One Auto Finance or E-LOAN.

Even better, do you belong to a credit union? These member-owned cooperative organizations offer lower rates because they do not need to earn as much profit as banks. If you belong to one, or can figure out a way to join, you can benefit from the one-half to 1 percentage point less interest that credit unions charge for auto loans, compared with banks. The simplest situation is when your company or your profession (college professor, state employee) has a credit union and you are automatically a member. But some credit unions will extend membership to siblings or even distant relations of those who already belong. So it may be worth checking with family members.

The Tax Advantages

Under current law, you get no tax breaks for the interest you pay on auto or other consumer loans, but if you take a home equity loan on your primary residence, that interest remains deductible. The limit on deductions is the interest on a loan totaling $100,000 if you are married filing jointly, or $50,000 if single. Thus, especially if you are married, only the very most expensive cars would trigger this. That may be the cheapest aftertax loan you can get to buy a new car--especially if you already have an approved home equity line of credit and will not have to pay origination fees to open a new one. But be careful. Look at your overall level of debt and the payments on your basic home mortgage. If payments are comfortable and the mortgage nearly paid off, this may be an attractive option. But remember: If you become overburdened, that extra payment could contribute to losing your house.

Once you see, decide to apply for a preapproved loan from a bank or credit union, and limit yourself to no more than one or two applications. Having too many lenders ask for your credit report can have a negative impact on your report and score. Check also whether a bank or credit union plans to charge you a fee just for applying. A high fee might send you elsewhere. Having a preapproved loan gives you the leverage you need when you actually go in to buy the car. Now you can keep your head clear in order to focus your energies on negotiating the best possible price on the car itself.

Jean Ann Fox, director of consumer protection for the Consumer Federation of America, advises consumers to be wary of sales pitches. "Just when you have exhausted yourself negotiating a good price for the car, the dealership is ready to make some real profits by selling you financial products," she warns. If you are uncertain about any of the proposals or the contracts you are asked to sign, counsels Fox, ask to take the contracts home overnight. "If it is such a good deal," she says, "it will still look good in the morning."

Having your own financing gives you yet another option if you are looking at a model where the manufacturer is offering a cash rebate as a possible alternative to low-rate financing. "Often it makes sense to take the rebate and keep your own financing," notes Greg McBride, senior financial analyst at Bankrate.com. The financial rate site has a calculator that will show you if the rebate or low-rate financing is your best choice once you know your options. Using the rebate to lower the total amount borrowed often will save you more than getting a loan with a lower interest rate.

On a Lincoln Navigator, for instance, the recent rebate was $2,000 that could not be combined with a low-rate financing offer of 3.9% or less. So at a $54,700 target price, monthly payments would be $1,233 on a 48-month loan with 3.9% financing. If instead you took the $2,000 rebate and reduced the loan amount, then got the best available outside rate, probably 5.15% from E-LOAN, your monthly payment would be cut slightly to $1,216.

If you're not ready to commit to buying a new vehicle, what about leasing one instead?

Published on 04/28/05

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