You should always keep all parts of a car buying transaction separate; this includes the financing.  You must have a plan for financing before you walk into the dealership. If you don't, you could negotiate a great deal on the price of the car and then lose a lot of your savings back to the dealership on the financing side.  In theory, there is no reason not to finance with the dealer; however, if you have negotiated a rock-bottom price on your car, you can expect that the dealership will try to get some of that money back in the financing process. Therefore, using your credit union for financing is our recommendation!

Borrowing from your Credit Union

The first credit union was established over 100 years ago and today there are over 1,100 credit unions nationwide. The primary purpose of a credit union is to encourage members to save money and to offer loans to members while charging lower interest rates for loans (as well as pay higher dividends on savings) because they are non-profit cooperatives. Rather than paying profits to stockholders, credit unions return earnings to members in the form of lower loan rates, dividends and/or improved services.

Qualifying for a Car Loan

When it comes to financing, our first rule of thumb is to focus on the total amount financed rather than on the monthly payment alone. To begin the finance application process, first get pre-approved by your credit union.

Loan Rates and Terms

Your credit union offers extremely competitive finance interest rates and terms for both new and used cars. Typically the shorter the loan term, the lower the interest rate. However, even in today’s 72 month term finance market, the rates are low compared to decades past.

Calculate your Monthly Payment

Before you finance your new auto, make sure that you verify independently what your monthly payment is going to be. This website has an excellent loan payment calculator that you can use which will show you your monthly payment.

Be aware of a dealer asking to take a credit application from you that will not lead to financing with the credit union. It is true that if you apply for multiple lines of credit such as for an auto from several different dealerships, credit cards, etc. in a short time period, this will negatively impact your score. However, according to the FICO website, "most credit scores are not affected by multiple inquiries from the same auto lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score."

One last thought. Your loan coupon book will often arrive after the first payment is due.  Make sure you find out how to make the first payment without a coupon to avoid penalties and a blot on your credit record.

Finance Office Sales Add-ons

There are a number of items that some dealerships try to sell you that you may or may not need, some dealers call these items "packs."  Here are a few examples.

• Undercoating – Given today's manufacturing techniques, rust-through is a very rare problem. Furthermore, most manufacturers have 5-7 year warranties against rust and corrosion. Undercoating is something you almost never need and could in some cases even damage the car.
• VIN Etching – This is an insurance product that may make it easier to recover the car if it is stolen.
• Window Tinting – If you really want this, the dealer can often arrange to have window tinting added onto a vehicle.
• Alarm System – Many cars come with an alarm system already installed.  If you desire a different system or supplemental anti-theft devices, the dealer can typically arrange to have these added to the vehicle.  
• Extended Warranties – An extended warranty is basically insurance for the mechanical items on your vehicle. We generally buy insurance for risks that we cannot tolerate. We will buy collision insurance in case we have a bad accident, but we will accept a $500 deductible because we can tolerate the risk of a $500 expenditure. If auto repairs, once the car comes off of the manufacturer’s warranty, an expense you feel you cannot tolerate? If you feel you absolutely must have an extended warranty, make sure the warranty is backed by a solid and reputable insurance company and not an unstable third-party warranty. Unfortunately, there have been some horror stories about third-party warranty companies going bankrupt, leaving customers holding the bag. Also, remember that the price of the warranty is negotiable like anything else.
• Gap Protection – This is insurance on top of insurance.  The idea is that if your car was totaled or stolen, you might owe more on it than the car was worth and therefore more than your insurance company will give you.  This insurance covers the gap between the two.

Occasionally dealers will actually install some of these items when the car arrives on the lot.  They then put a "supplemental sticker" on the car that will detail any items that are added. 

Frequently Asked Questions about Financing

Question: Can I close my credit union loan at the dealership?

Answer:  Yes, if your credit union is part of an indirect lending program that allows the auto dealer to act as a loan closing agent. These indirect lending arrangements make it simple and convenient to buy and finance the vehicle at one place.

Question: What about Zero percent financing or special auto maker finance rates?

Answer:  Initially, zero percent loans were for shorter terms but today zero or low auto manufacturer incentive rates are available for longer terms. However, there is usually a cost somewhere to get a no or low interest loan, and it is usually results in a much higher sales price on the car you are purchasing.

Question: How does credit rating work?

Answer: Many credit unions and banks are risk-based lenders. This basically means that the greater a risk of non-repayment a borrower is, the higher the interest rate they will likely receive on a loan. Bottom line, borrowers with a better credit rating or score will typically get lower interest rates.