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Car Buying

Financing a Car: Why You Should Always Shop Around for an Interest Rate

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author photo by Doug DeMuro

If you're interested in financing a car, you may be tempted to take the interest rate that your dealer offers and move on with the transaction, but we happen to think that isn't always the best idea, even if it seems like it's the easiest. Here's why.

The Dealer's Rate Isn't Always Best

In many cases, your local dealership will offer you an excellent interest rate on a new or used car. But in just as many cases, your local dealership will offer a mediocre rate -- or the dealer may bump up the rate a few points in order to make a larger profit. Of course, there's nothing wrong with this; the dealer is just trying to make some more money, but it illustrates why you, as a car shopper, should consider shopping around for a better rate before signing the papers.

Try a Bank or Other Lender

Before you visit a dealership's financing department, we suggest checking with a bank or another lender to see what kind of rate they can offer on a new or used vehicle. In some cases, a bank's rate may not be able to match a dealership's, especially if you're buying a new car and the dealer is offering a low-interest incentive to help the price stay competitive.

In many cases, though, you'll find that a bank will offer you a better rate than a dealership, so you'll save a lot of money over the life of the loan. Yes, it adds another step to the process (namely that you'll have to visit a bank before buying the car), and you'll need to call the bank from the dealership in order to have a check cut for the car, but if you're looking to get the best deal possible, shopping for a better interest rate is a no-brainer.

When Shouldn't You Shop Around?

In general, we suggest shopping around for the best interest rate in almost every situation when financing a car. Yes, this kind of loan shopping can harm your credit rate -- but only by a few points. It may save you hundreds -- or thousands -- of dollars in the long run, which certainly means that the benefits easily outweigh the drawbacks.

The only exception to our rule is if you've run across a manufacturer deal where the interest rate just can't go any lower. For instance, some automakers offer financing below 3 percent, and you'll be lucky to find a better deal than that at a bank. We wouldn't bother shopping for a better rate; you're unlikely to find anything much better, and you risk losing the deal if you take your time looking for another offer.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
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