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I've saved a lot but not enough money for a car... I am looking to buy a nissan versa which is ~13000 out the door. I have ~11000 that I can put towards a down payment so I am just shy of the full price out right...

My question is that if I approach the bank and say, "hey (look at my account), I am willing to put down 11k for a 13k loan on an asset that will depreciate to ~11k that first year in exchange for a great interest rate (something like 1-4%).

The bank basically gets a great low risk opportunity here... Am I missing something? My credit score is 800 something... but I am young and do not have much history or debt (which apparently is a bad thing?)

I am looking for an answer to see if this will reduce my rate or if it doesnt even matter how much I lay down. Moreover, I'm looking for someone to stop me saying this whole deal is cray-cray because... if there is a reason.

8

Can you reduce your interest rate? Talk to the lender. Maybe. Probably not. The rate reflects their perception of how much of a risk they're taking with the loan.

But if all you're borrowing is $2000, the savings that you might get out of any adjustment to the rate is not going to be all that significant. Sure, it would be nice, but it's not going to be enough to make or break your decision to buy this car. The big savings will be that you're paying interest on a much smaller loan, which means you can reduce your payments and/or pay it off more quickly.

REMINDER: NEVER TALK TO AN AUTO DEALER ABOUT FINANCING UNTIL AFTER THE PRICE OF THE CAR HAS BEEN NAILED DOWN -- otherwise they will raise the purchase price to cover the cost of offering you an apparently cheap loan.

  • 3
    I totally overlooked that simple fact! and yeah as a general rule I want to just come to the dealer with a pre-approved loan from my bank... – matt Nov 14 '14 at 0:49
  • That reminder is awesome, should be put in bold letters somewhere visible at every car dealer – jclozano Feb 27 '15 at 20:11
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Talk to your bank first but shop around a bit as well with other reputable lenders in your area.

Another option, if you're willing to put down ~84% of the purchase price would be to talk to several dealerships BEFORE you set foot on a single lot. Tell them that you are interested in buying a Versa and that you are willing to pay cash but you are not willing to pay more than $10,200. They won't agree (trust me on that) but they will come down from $13,000. Say "Thanks, I'll call you back." and call one of the other dealerships on your list and tell them "I just spoke with this dealership and they are willing to sell me the car for [whatever number they gave you]." One of two things will happen, either the dealership will come back with a lower price or they will tell you to go buy the car there. Continue this process until you have one dealership left.

I did this with 3 dealerships in 2011 and bought a truck with a $27,000 sticker price for just over $19,000. It took about a week to make all of the calls and I ended up going to a dealership 3 hours away but it was worth it for $8,000.

4

With that credit rating you should have no trouble getting a rate in that range. I have a similar credit score and my credit union gave me a car loan at 1.59%. No haggling required.

In regards to your question, I think you have it backwards. They are more likely to give you a good rate on a high balance than a low one. Think about it from the bank's perspective...

"If I give you a small sale, will you give me a discount?"

This is the question you are asking. Their profit is a factor of how much you borrow and the interest rate. Low rate=less profit, low financing amount = less profit.

The deal you proposed is a lose-lose for them.

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I had a strange experience buying a new car. They were offering a deal of 0.9% interest on the loan but only if the loan was above a certain amount. Below that amount, the interest rate was something like 3%. Given the amount I was willing to put down, it was cheaper to put less down and get the lower interest rate. So, once you agree to the purchase price, you need to discuss what finance options they offer. You might also check in advance with other loan providers (e.g. your bank) to see what offers they have.

  • That is odd but I would have to run the numbers. If that is the case for me, then it would still be cheaper to take the 3% (assumption made that min down on loan is 20%). – matt Nov 14 '14 at 0:50
  • Usually, the under-1% loans (sometimes 0%) are paid for by taking additional profit out of the sale of the car.. unless you get the price of the car nailed down HARD first. Also, as always, be sure you understand whether they're variable-rate loans (they usually are), how much they may go up per year, and what maximum they're allowed to rise to. Especially right now, when rates are historically low, you can generally bet that the initial rate on a variable-rate loan won't last. – keshlam Nov 14 '14 at 1:35
  • @keshlam The price of the car was negotiated before discussing financing. It was after closing time on the last day to make the sale count for the month so I suspect they were just in a hurry to get the deal done. The finance guy was good at running the numbers on how much interest I would pay with different down payments and resulting interest rates. – Eric Nov 14 '14 at 2:39
  • @keshlam, while your advice holds true in general. In my case, I plan on getting a fixed rate loan from my credit union and have that preapproved before I even go to the dealer. At the dealer, I'm just there to test drive and pay. I already know what the out the door price should be (a friend bought the exact same car there a few months ago). – matt Nov 18 '14 at 15:52
  • Those rates are not implausible. The loan company might figure 1% of $20,000 is more than 3% of $5,000. A lot of the cost of a loan is doing the paperwork, which is the same for a big loan as for a small loan. That's why "payday loans" have such high rates: Sure, if they charge you $20 to loan you $500 for 2 weeks, as a percentage that's 96% annual interest! Outrageous! But ... they have to pay somebody to do the paperwork. That probably blows most of the 20 bucks right there. (Plus the fact that somebody who needs to borrow money to pay the rent is probably not the best risk.) – Jay Feb 27 '15 at 19:01
0

The real answer is to talk to the bank.

In the case of the last car loan I got, the answer is "no". When I asked them about rates, they gave me a printed sheet that listed the loan rates they offered based on how old the car was, period. I forget the exact numbers but it was like: New car: 4%, 1 year old: 4.5%, 2-3 years old 5%, etc.

I suspect that at most banks these days, it's not up to the loan officer to come up with what he considers reasonable terms for a loan based on whatever factors you may bring up and he agrees are relevant. The bank is going to have a set policy, under these conditions, this is the rate, and that's what you get. So if the bank includes the size of the down payment in their calculations, then yes, it will be relevant. If they don't, than it won't. The thing to do would be to ask your bank.

If you're only borrowing $2000, and you've managed to save up $11,000, I'd guess you can pay off the $2,000 pretty quickly. So as Keshlam says, the interest rate probably isn't all that important. If you can pay it off in a year, then the difference between 5% and 1% is only $80. If you're buying a $13,000 car, I can't imagine you're going to agonize over $80.

BTW I've bought two cars in the last few years with about half the cost in cash and putting the rest on my credit card. (One for me and one for my daughter.) Then I paid off the credit card in a couple of months. Sure, the interest rate on a credit card is much higher than a car loan, but as it was only for a few months, it made very little real difference, and it took zero effort to arrange the loan and gave me total flexibility in the repayment schedule. Credit card companies often offer convenience checks where you pay like 3% or so transaction fee and then 0% interest for a year or more, so it would just cost the 3% up front fee.

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As others have already pointed out, the bank isn't getting your money upfront - the cash goes to the dealer and the bank will be financing you a much smaller amount. They really don't have any incentive to give you a better interest rate, but it never hurts to ask.

The more important (and unasked) question is should you do this? Keeping in mind that a loan with good credit could be in the 1.8% range. Average long-term returns in the market are over 3x that, so by paying upfront you're trading the opportunity for 6%+ returns for the ability to save -2% fees.

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