Why You Should Consider New Car Financing Outside of the Dealership

Shopping for a new car can be exhausting.

By the time you find the one you want – and haggle with a salesperson who has given you their best price three times – you’re ready to sign on almost any dotted line just to get out of the dealership.

That’s when you get shuttled off into a back office, where the new car financing guy saddles you with a high interest auto loan that results in you paying thousands of dollars more than you would have if you had just shopped for the loan ahead of time.

“In my mind, there are two completely separate transactions that take place when you buy a car,” said Shaun McGee, vice president of Financial Services for AAA Northeast. “One is negotiating the price of the car and the second is negotiating the financing of that purchase.”

While many buyers spend hours researching makes, features and even colors they want in a car, they rarely shop for new car financing, despite how important it is.

Here’s how you can find the best way to finance a car for your situation.

Buying a New Car

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Before You Buy

Buying a new car is exciting, but don’t rush it – you can save a lot money immediately and in the long run by doing research first.

For instance, the AAA Auto Buying program is a valuable resource that can help prospective car buyers find the car they want and see what other people have paid for that model vehicle. While shopping from AAA’s network of certified dealers, the AAA Auto Buying program can help buyers get a guaranteed price, which has resulted in the average AAA Member saving more than $3,400 on a new vehicle.

Another important step is to look at your financial situation and determine how much you can afford to spend on a new car. You should not only consider the car payments, but also the price of gas, preventative maintenance, repairs and more. Factor in the value of a trade-in vehicle that you own or any negative equity, which is the money you still owe on a car you previously financed.

Types of New Car Financing

When it comes to new car financing, you have two options:

Direct Lending

This is when you borrow money directly from bank, credit union or finance company and use that loan to pay for the car, which allows you to comparison shop to find the best deals and to know the credit terms – like annual percentage rate, length of term and maximum amount – before you get to the dealership.

Some financial institutions, like AAA, can offer you both an auto loan and all the ancillary products like an extended warranty, debt protection and other coverages at a significantly lower price than a dealership (which typically makes its money of the sale of these products).

For example, on the average car, AAA can help a buyer secure key fob replacement, tire and wheel protection and dent and ding protection for less than the price of replacing a single key fob, McGee said. And unlike a mortgage application, applying for an auto loan is a fast and easy process that takes only a few minutes, he added.

Dealership Financing

Another option is to apply for financing through the dealership. While it can be convenient to do the car buying and financing all in one shot, you may not be given any financing options from which to choose and you could get stuck paying a higher interest rate than if you shopped for financing on your own.

After You Sign

Just because you agreed to terms does not mean you are out of options. New car buyers always have the option to refinance – there is no law that says you cannot refinance an auto loan within the first 90 days. Refinancing a car can help you secure a lower interest rate on your loan, reduce your monthly payments and more.

McGee recalled a day recently when he helped someone who had just bought a car lower his interest rate from 9 percent to 3 percent; but he also noted that the buyer paid $999 for GAP protection for which AAA only charges $399. If the buyer had shopped around for new car financing before he bought his new vehicle, he could have saved a lot of money.

“If you don’t shop ahead of time, you don’t know if you’re getting a good deal,” McGee said. “And all it takes is one phone call to get the car you want a price you can afford.”

Have you ever financed a new car outside of the dealership? How was your experience? Tell us in the comments.

To learn how to apply for new car financing as low as 2.99 percent APR, go to AAA.com/AutoLoans.