How To Buy A Car – Part 2: Financing

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In my last post, I discussed researching your desired car before buying.  You should also research how you will finance your purchase before visiting a dealer to buy, assuming you don’t have enough cash.  Ideally, you have saved up a big pile of money for at least a big down payment to reduce your monthly payments and interest.  But the reality for most people is that cars are so expensive that they need to get a car loan.  At least interest rates on car loans can be fairly low depending upon your credit score, so as usual, shopping around pays.

Check several places for the best auto loan including banks, credit unions, dealerships, and these websites:  bankrate.com, eloan.com, and lendingtree.com.  Credit unions frequently have the best rates.  When you find a good loan, try to get “pre-approved” so that you know your interest rate, how big a loan you can handle, and your monthly payment.  To get pre-approved, you supply the requested financial information so they can review your income, debts, credit rating, and other financial information to know what rate they will offer you and how big a loan you can get.  The better your credit score based upon your credit history, the better rate you will get.  Borrowers with a short credit history may not qualify for a loan from a bank, but might still be eligible for a loan from the car company.

After you have agreed upon a price with the dealer, then discuss financing.  Never end up at a dealer’s financing desk without already knowing what rate you could get elsewhere.  Be ready to negotiate with the dealer to see if they can beat your pre-approved loan.  Compare the dealer’s rate and terms with your pre-approved loan from your bank or credit union.  Dealers’ financing rates are negotiable unless they are part of a current special offer.  Consider these financing options to lessen the amount of interest you pay (and the ultimate cost of your shiny new car):

  • Pay at least 20% of the cost up front, even if the lender does not require it (unless you have higher rate debts elsewhere such as credit cards).
  • Agree upon the shortest term possible; preferably four years, five is acceptable, but avoid seven. The longer the term not only means paying more interest, but also that soon your car will be worth less than the amount you still owe on it.  Many web loan calculators and smartphone apps will let you compare the monthly payment, amount of interest you will owe, and differing loan lengths.
  • Sometimes a bigger down payment and/or shorter term will qualify you for a lower interest rate. On the other hand, the longer the term to pay it back, the lower your monthly payments will be – which is a serious consideration if you are still paying off credit card debt with an interest rate higher than your auto loan.

Avoid paying interest rates that are significantly above the local average, which is too common at used car dealerships.  If you have a poor credit history and are unable to get an affordable rate, it’s probably better to save up more money and/or get a less expensive car.  An older, less expensive car does not always have more problems than a newer, more expensive vehicle.  Just put away some savings for repair bills (remember that emergency fund you should have).