Know what is negotiable

In addition to the price of the vehicle, there are the terms and costs of the auto loan that you may be able to negotiate or control. These items, taken together, will influence the amount of your monthly payment and the total loan cost. Later we’ll give you tips on how to focus your negotiation to lower your total cost.

Negotiable loan terms and features

• Annual Percentage Rate (APR) and interest rate
  
• Length of loan
  
• Whether or not there will be a prepayment penalty
  
• Any additional fees associated with the loan
  

Optional “add-ons” that increase the amount you’ll borrow

• Optional products for the loan or vehicle such as extended warranties, GAP insurance, and credit insurance.
  
• Optional physical features for the vehicle, such as alarm systems, window tinting, and tire and wheel protection.
  

Other things that affect the amount you’ll borrow

• Trade-in amount (if you trade-in your vehicle)
  
• Amount of the down payment
  
• Fees charged by the dealer such as dealer preparation fees, origination fees, document fees, and delivery charges.
  

You cannot negotiate taxes or title and registration fees. These are set by your local or state government.

Many people think about a loan in terms of the monthly payment. Be careful here. If you reduce the monthly payment by taking out a longer loan, you may pay much more in interest. The total cost of the vehicle financing matters. By negotiating for better terms on your loan, you can reduce the total amount of money you pay over time. For example:

• Getting a lower interest rate and APR means you will pay less to borrow money. The total cost of your loan will be lower.
• A shorter loan term (in which you make monthly payments for fewer months) will reduce your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan.
• A higher down payment, or a higher price for your trade-in, will reduce the total amount financed because you will have to borrow less money.
• Optional “add-on” products like extended warranties, GAP insurance, or credit insurance that are added into your loan amount will increase your total cost because you will be borrowing more money.
  

Example

Below is a sample comparison to illustrate how you will pay less in the long run if you have a shorter loan term. The table below assumes a $20,000 loan and an interest rate of 4.75%.

While the lower monthly payment for a longer period of time may look like the way to go, consider the total interest cost over the life of the loan. If you paid off a $20,000 loan in three years, you will pay $1,498 in interest. For a six-year loan, you will pay $3,024 in interest – more than twice as much.

Some financial advisers recommend keeping the length of your auto loan to five years or less, reasoning that the longer the loan, the longer you will owe more than the vehicle is worth, which is called negative equity.

When negotiating for your loan, make sure you keep track of all the factors that affect the total cost. If you are negotiating the interest rate, make sure that you also know the length of the loan and other terms. Comparing total loan cost will help you keep an eye on these multiple factors.

Use the auto loan worksheet  to help keep track of the different factors.

Ask the dealer or lender to tell you the price, trade-in value (if applicable), interest rate, term of the loan, and estimated monthly payments, and write these numbers down on the auto loan worksheet. It’s best to get these numbers early in the process, so you can better compare and negotiate.

Just as the first price you are offered for the vehicle may not be the lowest price available to you, the first rate for a loan the lender or dealer offers you may not be the lowest rate you qualify for. If the lender or dealer agrees to a better loan feature (such as a lower APR or interest rate), check to make sure other factors, like the length of the loan or the amount financed, haven’t changed. A lower monthly payment doesn’t necessarily mean a lower interest rate; it might just mean that you are paying for a longer time.

Helpful resources

For additional help, an online auto loan calculator may be helpful in evaluating and comparing the costs and terms of various auto loans. For example, Consumer Reports  and the NADA Guides  both provide online calculators.