Finance a Car

You’ve found the car of your dreams. Now what do you do? How do you get the money for it? When an individual decides to buy a new or used car, he or she often needs to finance part of or all of the vehicle’s price. Because cars are such a big purchase, many buyers can't provide cash down for the vehicle, so they choose to finance a car over a period of time. There are two financing routes you can choose to go down — either getting a direct or a dealer loan. Before you choose to finance your next vehicle, you should do your homework to ensure that you get the best deal.

Steps

Doing Your Homework

1. Find out how much you can afford up front. If you know the ballpark value of what you want to pay for a vehicle, and how much you can afford to pay in cash, you will know about how much you will need to finance.
   • Maximize your down payment. A smart way to finance a car is to get as much of a down payment as you can. The more you can pay at the beginning of a deal, the less you will have to pay in interest. Even if you have to temporarily sell some assets to buy the car outright, that can be a better deal than financing a major portion of the cost.
2. Know your credit score. Much of the financing offer for a car is based on your credit score. Those with good credit will get better interest rates and cheaper car financing offers. This is important no matter who you finance your vehicle through.
   • Find out your credit score either through the dealer or online at websites like www.annualcreditreport.com, www.freecreditscore.com, www.creditkarma.com, or www.myfico.com.
   • If your credit score is higher than 680, you are considered a prime borrower and are eligible for the best interest rates available. The higher your score, the better bargaining position you will be in.
3. Compare loan rates online. There are many websites that compare deals at no cost. Additionally, it is a great way to get in contact with various companies.
4. Get the necessary materials together. Most lenders will want your name, social security number, date of birth, previous and current addresses, occupation, proof of income, and information on other outstanding debts.

Getting a Direct Loan

1. Contact certified lenders. Local and national banks, as well as credit unions can give you the terms and interest rates they are offering on used car loans over the phone and online. Shop around and find the best rate for you. You don't have to apply for financing through the dealer, though you certainly can. Oftentimes you can get a fairer deal when you figure out your financing first before you walk into the dealership. Apply for financing through a bank or an app that connects you to lenders (like AutoGravity).
   • Oftentimes, credit unions have the lowest interest rates, especially if you are a member. Check with your employer to see if they have any connections with local credit unions for you to take advantage of.
   • Many lenders offer 5 year loans on vehicles that are five years old at most. Older vehicles are often only eligible for 1 to 2 year loans. In many cases, the fear is that an older car will break down and then borrowers will default on their loans.
   • Additionally, lenders often impose mileage restrictions (often 100,000 miles) and will not finance salvage-titled vehicles. Typically, they will only fund loans for vehicles purchased through a franchised dealership, not through a private party or independent dealer. In these cases, you’ll have to get a deal loan. See below.
2. Solicit rate quotes from several lenders. The interest rates offered on used car loans are generally 4 to 6 percent higher than rates offered on new car loans. This is because lenders are fearful of financing used vehicles.
   • Be as specific as possible with a lender. Provide the lender with information about the vehicle you choose. You will need to provide the car's make, model and VIN number, among other things. The more detail you can give the lender, the more firm your rate quote will be.
   • Talk to lenders about any fees or extra charges. Some lenders offer low interest rates and make back the money by tacking on additional fees and charges to a loan deal. You'll want to know about these, as well as any other specific loan agreement aspects like prepayment penalties, which can trigger fees if you pay the loan off early.
3. Get prequalified. Fill out the paperwork ahead of time. Many banks or lenders will pre-qualify you for a car loan based on your credit score, the type of car you plan on purchasing, and your driving history.
4. Ask the lender with the best rate offer for a pre-qualification letter. It should outline the terms and conditions of the loan. Bring this letter with you to the dealership when shopping for the car. When you go to the dealer's lot, you can show them evidence pre-qualification from a reputable lender. This will expedite the car buying experience. It will also tell the car dealer you are ready to buy.
   • If you haven’t prequalified, you can get financing at the dealer's lot for a one-stop shopping experience, but having other lender alternatives helps you to get the best deal.

Getting a Dealer Loan

1. Get a loan through a new or used car dealer.
   • In general, interest rates offered by dealerships are higher than interest rates you can find directly from a lender. In many cases, smaller dealerships work with third party lenders to finance your vehicle. Because they play the middleman, they pass off the costs to you. Therefore, you may want to apply for a direct loan first and cut out the dealership middleman.
   • In some cases, financing lenders like local banks and credit unions won’t take a chance on used cars. For used cars, most dealers will finance used cars they sell, regardless of its age. Therefore, you may want to apply for a dealer loan if a direct lender denies you financing.
2. Bring leverage. Bring interest rates from direct loan lenders, even if you plan on financing with the dealer. Dealers are more likely to offer lower interest rates, if you show them that you know what other lenders are offering. Make sure you research competitive interest rates based on your credit score.
3. Offer a down payment in cash or trade equivalent to at least 10% of the vehicle's purchase price. The larger the down payment, the less money you will have to finance and the less interest you’ll have to pay on that loan.

Tips

• If you have a low credit score, consider asking someone with a high credit score to co-sign on a loan. A co-signor with a high credit score may help you to secure a lower-interest loan.
• If your loan application gets rejected, don’t feel bad. Most likely, the lender doesn’t think you are able to pay back the loan on time. Reassess your budget and try again or try a different lender.

Warnings

• If you finance a used car, be prepared to pay for comprehensive insurance on the vehicle, which is more expensive than collision insurance commonly applied to used cars. Lenders require that you carry comprehensive insurance to protect their investment. Lenders often fear that if you damage the car, you will default on the loan, so they make you take out better insurance.
• Be wary of dealers who advertise financing with "no credit check." Typically, these car lots sell high-mileage vehicles with inflated down payments and interest rates.

References

• https://www.autogravity.com
• http://www.moneyunder30.com/how-finance-car-smart
• https://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing

Quick Summary

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See also

• Apply for a Used Car Loan
• Redeem Your Repossessed Car
• Transfer a Car Lease
• Get Your Ex Off a Car Loan
• Get a Car Loan While in the Military
• Compare Car Loan Rates
• Buy a Car with Bad Credit
• Find Alternative Finances for Your Auto Loan
• Negotiate an Interest Rate on a Lease Buy Out Car Loan
• Make your New Car Tax Deductible using a Home Equity Loan

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