When you finally make that big decision to buy a new car, there are many options you have to consider. Obviously, you have to consider what kind of car you want and what prices fit into your budget. Financing a car is big responsibility to take on. Between the down payment, insurance, your monthly payments, and routine maintenance, a lot of money goes into owning a car. Most people try to save money wherever they can and deciding what lender to use is a huge part of that. Most people either go with a loan from a bank, lender, or use the dealership financing options. So, which one is the cheapest?
The simple answer is: it depends. There are a lot of factors that control how cheap or expensive different lenders are.
Banks are generally the cheapest lenders. Many banks, and especially credit unions, offer interest rates on their loans that are less than 10%.
Generally, dealership interest rates run higher than a bank’s interest rates because they are the middle man. They markup whatever interest rate the banks offer them. Generally, the average markup is about 2.5%. The amount that a dealer can markup the interest rate is controlled by the state.
But, dealerships do run great deals from time to time. Many dealers have specials where they offer 0% for a certain amount of time. No interest means a cheaper car payment for the specified amount of time. You can’t beat that! Banks and other lenders will not be able to offer you that cheap of an interest rate because they wouldn’t be able to make money that way. Dealers are already making a profit from selling you the car, so the 0% interest rate is their incentive to bring you into the showroom.
Dealer interest rates can also be negotiable. While interest rates at both the dealership and the bank are based off of credit scores, the dealership has some leeway in the rate they charge you because of the markup. If they give you an interest rate you don’t like, you may be able to haggle your way out of it. The bank interest rates are set and there is no way to talk them down from it.
While the dealership is a one-stop shop, making it easy for you to get your loan and your car all at once, most banks and credit unions will allow you to apply for a loan online in minutes.
Bank Rate publishes three months trends in average car interest rates. This will help you determine if the rate you’re being charged is reasonable.
Long-term affordability depends on the interest rate you receive and how long it lasts. The better credit score you have, the better chances you have of getting a good deal on an interest rate. Paying for a car can last anywhere from 3 to 7 years, at most, so a cheaper interest rate is key to paying less for the car in the long run. Take your time and do your research before you jump headfirst into financing a car. Keep an eye out for promotions from the dealer as well as your bank. Timing your purchase just right can lead you to saving money in the long run.
This article originally appeared on YourMechanic.com as What's the Cheapest Way to Finance Buying a Car? and was authored by Keisha Page.