All business at the negotiation table

How to negotiate the interest rate on your car loan

Negotiation is an art. As with any art, some have a natural flair for it, and some have to work at it a little bit harder.

But even if you aren't born with that certain 'je ne sais quoi' that drives favourable deal-making, you can still excel at negotiation. All it takes is a little extra preparation and strategizing.

Nowhere is that more true than with car loan negotiations. Auto dealers and third-party lenders are extremely well-versed in these types of conversations; they know all the tricks of the trade. To secure the best interest rate for yourself, you'll need to be armed with enough information to put pressure on that financier and tilt the odds in your favour.

Ready to learn how?

Cover your bases

Before you even sit down at the negotiating table, you can help your cause in a huge way by covering your financial bases.

Lenders love monetary stability. It means that they'll get their payments on time and won't have to worry about you defaulting. Even though having a stable situation sort of implies that you could be paying a bit more, it'll actually help you make a case for paying less in negotiations, because you're doing the lender a favour by making their life easier—and they should reward that.

The best way to prove your stability is by having a strong credit score. Your reputation can be just as important as your current flow of income. So do your best to keep your credit score clean at all times, and try to improve it in a hurry if you have to.

Do your homework

It's imperative that you are well-informed about the lending options in your area. It would be naive to think that your dealer's offer, or the first offer you stumble upon elsewhere, is the best one out there. In fact, it's probably the opposite: you can probably do a lot better.

Consult all available resources. Use loan comparison websites such as this one to get quick and easy quotes, search directories to find nearby credit unions and third-party lenders, get rates from local banks, see what national lenders are offering, check out online forums that may provide tips and testimonials, talk to friends and relatives about their experiences getting loans. If you're not finding many options under three per cent, then you can do better.

Knowing which options give you the best starting point will help you directly in making your eventual choice, and also indirectly, as we'll discuss...right now!

Use knowledge as leverage

One of the benefits of having done your homework is that it allows you to go into a negotiation session (probably with a dealer or third-party lender, because banks and credit unions will probably be less flexible), is that it allows you to use the knowledge of what others offer as a tool for driving down the interest rate being offered to you by a certain lender. For many of them, there will be a breaking point at which it is in their best interests to meet your demands rather than lose the loan altogether.

This doesn't give you an excuse to be rude or threatening. Just state the facts. Stand your ground and let them know that you are also weighing attractive offers elsewhere. You can even spin it in a complimentary way (e.g. "I really want to borrow from you because there's so many things I like about your offer, but I'm just not sure I can with the interest rate the way it is).

Make short-term sacrifices

Lenders will be inclined to give you a great interest rate if you can also give them something (or things) they want.

One option is to make a hefty down payment. This puts money in the lender's pocket right away, something we know that person will love.

Similarly, you can offer to accept a short payment schedule. Again, this might be a hard pill to swallow in the immediate future, but it will entice the lender into lowering your rate and ultimately save you quite a bit of money.