Buyer’s Guide: How to Finance a Car

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A couple shopping for a car at a dealership/Image Credit: ANTONI SHKRABA

You found the car of your dreams, but now you have to find a way to pay for that sweet ride. This means you’ll be taking out a loan and the terms you get could have a big effect on that monthly payment. We all tend to look at the cost of a car as the sticker on the window, but financing plays a big part in the overall cost. You can save thousands of dollars with careful financing. These tips will help make sure you get the best deal when you sign on the dotted line.

Know Your Credit Score

A good credit score will mean a better interest rate on your loan

It’s worth checking your credit score when you start car shopping. Those with good credit will get the best deals, but even those with bad credit will likely still be able to get a loan. The difference will be the interest rate you receive. Bad credit or no credit will mean a higher interest rate, so you’ll be paying more over the life of the loan. Knowing where you stand before you walk into the dealership will help you avoid any unpleasant surprises and will let you budget for a potentially higher monthly payment.

Shop Around for Financing

Banks and credit unions will have different financing options available

Most people check out more than one dealership for their car and they should be shopping at more than one place for a car loan. The dealer is only one option and their rates aren’t always great if your credit isn’t good. Before you even set foot in a dealership, check the rates at local banks and especially members-only credit unions. Saving a few percent on the loan can save thousands of dollars over the long term. It might be worth opening an account at a new institution to take advantage of a better interest rate.

Keep the Loan Term Short

Pay attention to the details on an auto loan

The term, or length, of your loan can reduce the amount of interest you pay overall. Spread your car loan out over 7 years and you’ll be paying more in the end than you will with a 3- or 5-year loan. The shorter the loan, however, the greater the monthly payment. It’s a balancing act. Once you know how much you can afford to pay each month, take out the shortest loan term that keeps your monthly payment at that number.

Put Money Down

A down payment lowers the amount you need to finance

It might be tough to come up with a down payment for a car, but at least it’s not as hard as coming up with one for a house. You can get a car loan with no money down, but it’s not your best bet. Not only will a down payment reduce your monthly payments, but it will make it less likely that you’ll owe more than your car is worth if you’re suddenly forced to sell. Obviously, trading a vehicle in is a great way to come up with a down payment.

The process of buying a car is time-consuming and figuring out financing is just as important as deciding on which car you want. It’s not fun, but taking the extra time to secure the best loan possible will keep more cash in your pocket to fill up that tank and go for a ride.