When shopping for a car, most people decide to obtain a loan through the car dealership itself. It’s the most convenient option and dealerships promise you the best available rate, However, most dealers simply arrange financing for you–they obtain a loan commitment from the automaker’s financing company and then mark up the loan by adding two to three percentage points to your rate.
If you qualify for a 5 percent interest rate loan, for example, you may actually pay 8 percent. This practice can add at least $1,000 to the cost of your auto loan. How can you avoid this extra charge?
* Get pre-approved for a loan before you go shopping. A bank loan may be available. Then you can negotiate the best price on a vehicle without hassling about the financing.
* Call your credit union. Many credit unions have a list of dealerships they recommend to their members. In return, those dealerships provide loans to those members at the credit union’s interest rate, without a markup.
* Tap your home equity. If you’re willing to use your house as collateral for a car loan, you’ll get a low interest rate, easy access to credit, and the interest you pay may be tax-deductible.