Have you ever seen ads for really great special deals on new cars? The offers can be attractive, but there is a catch. The truth is that not all shoppers will be eligible for the deals advertised. Typically, only a well-qualified buyer can take advantage of the special financing or lease terms. But what exactly does it mean to be "well-qualified?" Certainly, a solid history of financial responsibility is helpful when borrowing, but there's more to getting the best rate on a new-car lease or loan beyond a high credit score.
For example, does the buyer have so-so credit but a high income relative to the cost of the vehicle? If so, he or she may be a well-qualified buyer for a model with a modest price. Alternately, some shoppers may bring an excellent credit history to the negotiating table while shopping for a car that's just too expensive given their income. Despite a record of on-time payments, a dealer may not offer its lowest advertised terms in this situation.
Of course, dealers want to sell cars, so even buyers who don't get the very best financing or leasing rates have options. But for any new-car negotiation, shoppers should know the best ways to get not just a good rate but a good deal overall.
Great Rate, High Price
One way automakers and their financing partners offset low interest rates is by keeping sales prices high. A cash buyer, for example, may negotiate a lower sales price on the same vehicle than a buyer who finances it at a special, low rate. Similarly, sellers can offset the risk of a borderline-qualified buyer by bumping up the sales price. The result is the same as selling the vehicle for less money but with a higher interest rate.
A higher price and lower rate aren't necessarily bad, but shoppers should know their options. Especially for popular models with high availability, shoppers should compare deals with different rates and sales prices side by side before making a decision.
Also, the special interest rates and lease terms that you see advertised on TV typically only apply when you use that automaker's preferred lender, such as Nissan Motor Acceptance Corporation or Ford Motor Credit.
If you're not getting the financing or lease terms you want at the dealer, one option may be to spend more cash up front for your down payment (in a lease, this is called a capitalized cost reduction). When financing a car for purchase, this reduces the amount borrowed and could convince a lender to offer a lower rate. The effect is similar for leases, although lease customers are typically chasing a low monthly payment rather than a low interest rate.
Choosing a shorter loan term can sometimes help buyers to qualify for a low interest rate, too. Some automakers advertise deals with a 0 percent annual percentage rate for up to 60 months for well-qualified buyers. Those with less favorable credit may still qualify for a no-interest loan, but only for a term of 36 or 48 months.
New-car shoppers not deemed as well-qualified for the rate or terms they want still have other options. One is to borrow from a financial institution, such as a bank or credit union. You'll still need good credit, but it might be easier to qualify if you use your own bank. Shoppers who already have a relationship with their bank may find better terms there than at the dealership. Using an outside lender can make negotiating a purchase easier, too. Also, banks and credit unions have their own special deals throughout the year.
Another alternative is to find a cosigner with excellent credit. A young buyer with little credit history, for example, may need a more financially established family member or friend to cosign. This requires trust, though. Typically, the cosigner can be held responsible for the entire loan amount if the borrower defaults.
What it means to you: Before you get your heart set on that perfect new car at an affordable monthly payment, keep in mind that advertised rates are typically reserved for the most qualified buyers and lessees. If you can't get the deal you want, consider options such as finding an outside lender or a cosigner.