Auto Financing: What You Need to Know

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Know your auto credit score? Have you shopped around? Are you prepared for a bidding war? Brush up on your auto financing knowledge before your next trip to the dealership.

Last winter, I bought a car towards the end of the season. I’m pretty sure I was a fool, as I bought used, and was met with no room for negotiation. Used salesmen don’t get paid on a traditional commission model in our area anymore, and buyers are on the losing end of the supply/demand curve at the moment.

A week later, I heard an ad on the radio for a brand, spanking new car for a marginal amount more. It was a better make. It was likely just as stock as the used model I had just purchased. Even their ad said they were willing to negotiate. I was kicking myself.

Winter is hard on new car salesmen. Not as many people come in to buy, and when you’re paid on commission that can be a tough fact to reconcile. Prices plunge as dealerships are eager to see revenue, even if it’s not as big of a cut as they’d see in warmer months.

The end of year is even more of shopper’s dream. Dealerships are motivated to get last year’s models off the lot, and put on sales to draw people in. If you’re in need of a car, you may want to skip the line for that super jumbo TV at Walmart on Black Friday. There may be a better deal for you at the dealership.

Because I know you’re smart shoppers, and you’ll be among the ones shopping in these colder months if you have an automotive need, I wanted to take a minute to review with you one of the most important processes I’ve learned over my years of car buying: auto financing.

While it would be great if you could go in and buy a car in straight cash, I know sometimes that’s not possible. It hasn’t been for me since I started refusing to buy the worst clunkers around. That doesn’t mean that you can’t be smart about your financing, though. You’ll need to understand your credit score. You’ll need to know how to shop around. And you’ll need to be ready to spend another hour or so at dealership while they launch an all-out bidding war for you.

Your Credit Score Will Be Calculated Differently

Before you even buy a car, it’s a good idea to know what your credit score is. A higher score will reward you with lower interest rates, which can save you a good bit of money over the course of your loan.

Most lenders will use your base credit score. In the case of auto loans, they’re more likely to use your auto score. Your auto score is like your credit score in many ways. If you have a long length of credit history, have a history of paying your debts on time, and have a low debt to credit ratio, your score is likely to be higher.

An auto score, however, takes other factors into consideration with more weight. They will scrutinize things like payments on past auto loans, past settlements on auto loans, and if you had an auto loan or lease included in any past bankruptcies far more closely.

Auto scores tend to have a larger range, meaning they start below the traditional 300 and go above the traditional 850. A higher score will mean a better interest rate, but auto scores cannot be measured on the same scale.

Commence the Bidding War

After you’re for sure on your car, the dealership will offer to run numbers for you. They’ll pull your credit score(s), submit the loan amount along with your information to a slew of banks they work with, and have them initiate a bidding war over you.

The bank that comes in with the lowest rate wins. Not the lowest payments. Payments may be spread out over a longer period of time to give you the illusion of owing less money, or making the payments more manageable. But lower interest rates will save you more money, especially if the term of the loan is shorter.

Coming in Prepared

Before you even go into the dealership, get some quotes yourself. Call your bank. Call other banks. Call credit unions. Seriously on the credit union thing. I was a fool and didn’t try them this time around. For example, PenFed Credit Union currently has rates as low as 1.49% on new vehicles and as low as 1.99% on used, which is a good bit less than what I’m paying now. And I thought I had a pretty decent rate. There may be a refinance in my future…

In my situation, the bidding war got me lower rates than my bank. That may not have been the case if I had shopped credit unions. Either way, going in armed with your own quotes is a good way to make sure you’ll be happy with the interest rate you walk out with. If the bidding war hadn’t panned out, I knew I could still more than reasonably afford the quoted rate I had walked in with.

What have you learned about auto financing through the car buying process? Do you buy when it’s cold? Let us know in the comments!


*This post is in partnership with PenFed Credit Union. All content has been created by and is the opinion of Femme Frugality.*


20 thoughts on “Auto Financing: What You Need to Know

  1. Emily @ JohnJaneDoe

    I knew people were hanging on to cars longer, which was making good used cars more expensive. I hadn’t thought how that might be affecting the compensation model of the car salesmen. Also did not know that the credit score was calculated differently, though it makes sense. Neat information!

  2. Tawcan

    Very interesting stuff, learned a lot things that I didn’t know about auto financing and how car salesmen are compensated. I’m in the camp that when buying a car, buy with cash.

    1. femmefrugality Post author

      Definitely. If you can buy with cash, it would be insanity not to. For many, though, it’s not an option, so it’s good to be smart about the financing process.

  3. Femme Frugality

    Even bad used cars have gone up! It’s craziness. I think it’s a combination of cash for clunkers taking a ton of inventory off the market and people almost simultaneously changing some of their spending habits after the recession. More demand. Less supply. Much higher prices.

    1. Femme Frugality

      That’s an awesome rate! I have a pretty darn good credit history, too, and got what I thought was a fantastic rate, but now that I compare…

      We hang on to ours, too. Depreciating asset, so we prefer to look at them as tools instead of assets.

    1. Claudia @ Two Cup House

      Me too. I had no idea. Thanks for the info. Credit unions seem to have the best rates. Though we were regular financers before, we’ll strive to purchase in cash from now on. But knowing that credit unions have great rates has me considering changing banks now in case we need a loan in the future. Thanks!

  4. May

    My car is about to die! Sniff. It has about 140,000 miles on it so i don’t think I can complain too much. I always buy new. I know people say this is a bad idea but I don’t care because I have yet to find a used car I like. I drive my cars into the ground and try to hang on to them as long as possible. Every car I have bought has been at the end of the model year to get the best deal I can. They are worth less but if you plan to hang on to them it is a bargain.

  5. Hayley @ Disease Called Debt

    I must admit I didn’t know that there was a better time of year to buy cars! I’ll definitely bear this in mind next time. I managed to buy my last used car in cash, but in previous years, I’ve had car finance. I just went with what the dealer offered me. I was more bothered about the actual payment amount each month rather than the interest rate. Lessons learned though!

  6. Heather @ Simply Save

    I bought my last car in the fall when the next year’s models were coming out. They didn’t negotiate at all for either, but the previous year had a better interest rate and was otherwise nearly identical, so I went with that!

    1. femmefrugality Post author

      Yeah with the prices we were looking at we would have bought cash if we had $8-10k handy without totally draining our emergency savings (because you know that dang thing is going to need repairs at some point, and putting repairs on the credit card is way more expensive than paying a marginal interest rate on a loan.) But that’s not real life for us right now.


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