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Auto Financing For Smart People: Tips For Saving On Your Car Loan

Save money on auto financing by knowing your credit score and leveraging competing loan offers at the dealership. Put money down, keep the term as short as you can afford, and—of course—don’t buy more car than you can afford.

The Smart Way To Finance A CarOne of the biggest mistakes people make when buying a new car is forgetting to include the cost of auto financing in the total price.

For example, if you’re buying a new Honda Civic, the difference between “sticker price” and the dealer’s invoice price (what the dealer paid for the car) is about $1,500. If you negotiate well, you could save $1,000 or more on the price of the car.

If you then finance the car for four years at six percent with nothing down, you’ll pay over $2,000 in interest. Financing the car for three years at four percent with a $1,500 down payment, however, can save you over $1,000.

If you’re willing to negotiate the price of the car, you shouldn’t ignore the rates and terms of your financing. I made this mistake the first time I bought a car and vowed never to do it again.

If you’re in the market for a new car, don’t wait until you’re in “the box” (what some dealers call the offices where you finish the paperwork) to think about your financing.

Visit EVEN and find the optimal personal loan based on your individual needs and situation.

Auto financing tips

You car is not an investment. Quite the contrary: Cars depreciate like crazy. For this reason alone, it’s not smart to pay interest on a car loan. What happens in most cases is that the car depreciates and the value of the car drops faster than you repay the loan, leaving you upside down or underwater (when you owe more on the loan than the car is worth).

That said, many of us need cars to get to our jobs and don’t have the cash lying around to buy a reliable ride. So we get a car loan. That’s cool, but there’s a difference between using a car loan wisely and using it to buy a lot of car you can’t afford.

I have the credit and income to go out and get a loan for a BMW M3. And I would love that car. But that doesn’t mean I should get it. What the dealerships will tell you you can afford and what you should spend are two very different things. Use our car affordability calculator to see what you can afford.

Whenever you finance a car, you want to think about it not just in terms of the monthly payment, but also in terms of the total cost. Here’s what I recommend:

1. Understand your credit score before you go to the dealership

If there’s ever a time to check and track your credit report and score, it’s before you get a car loan.

Here’s the deal: Unlike mortgages or a credit card, you can usually get a car loan even if you have pretty bad credit—you’ll just pay (a lot) more. The reason? It’s relatively easy for the banks to repossess a car if you don’t pay.

But if you have shaky credit, you’re likely excited to even get a loan, so you’re not going to want to ask if there’s a lower rate available. Dealers know this and they make a lot of money on it.

Free tools like Credit Karma can help you understand your credit score. Once you know your credit score, you can figure out if you can qualify for the best car loan rates.

Dealerships will often advertise very good interest rates on new cars: 2.9 percent, 1.9 percent, sometimes even 0 percent. What they leave in the fine print is that these rates are only available to buyers with the best credit—that may mean a FICO score of 750 or better.

Buyers with credit scores in the low 700s can still get a good interest rate but may not qualify for the best promotions. After that, rates rise quickly. Borrowers with below average credit scores (under 650) may be presented with car loan rates of 10 percent or more.

The lower your credit score, the more important it becomes to shop around and make sure you’re getting the best rate a bank can offer you. Yes, you may have to pay more than someone with good credit, but you may not have to pay the first rate somebody offers.

2. If your credit isn’t perfect, get financing quotes before you go

If you have excellent credit and you know it, you can usually get the best financing rates right from the dealership (who serves as a broker for multiple lenders).

Don’t have stellar credit? Try online lenders. You complete a credit application and are presented with your interest rate and a max amount you can spend on the car. The nice thing is you don’t have to use this loan if the dealer gives you a better deal, but at least you can walk through the door knowing that you have an interest rate to beat.

One of our favorite loan matching services is EVEN Financial. When we were considering partnering with them, we tried their services and found that they provide the lowest-cost loans based on your individual needs and situation. You can read our review or try them out yourselves.

Most of the time, local banks and credit unions can offer borrowers with average credit the most competitive interest rates on both new and used car loans. Even better, you may be able to use the pre-arranged financing as a bargaining chip with the dealership’s finance and insurance (F&I) manager and score an even lower interest rate.

3. Keep the term as short as you can afford

Shorter loan terms come with lower interest rates but higher monthly payments. And that’s what you want.

When you walk into a dealership and say you want to finance your car, any savvy car salesperson will try to negotiate with you you based upon your monthly payment, not the overall purchase price of the car. By doing so, the sales rep can show you lower and lower payments by extending the the term of your loan, not by reducing the price of the car. Suddenly a $470 car payment becomes a $350 car payment. And yet you’re not paying any less for the car. In fact, you’ll be paying much more in interest.

The longer you take to repay a loan, the more interest you’ll pay. But that’s not all. Many times banks will charge higher interest rates for longer loans, further increasing your cost of credit.

Related: How to Pay Off a Car Loan Early

It’s tempting to stretch out an auto loan over five or even six years to get to a more comfortable monthly payment, but this means you’ll pay a lot more in interest and almost certainly be upside down on your car for nearly the life of the loan.

4. Put 20 percent down

In addition to a short loan term, you can avoid a situation in which you owe more money than the car is worth by putting money down.

This may seem like a no-brainer, but many dealerships don’t even require buyers with good credit to make any down payment at all.

Driving off in your new car without putting a penny down is tempting, but it’s risky. If you find yourself suddenly needing to sell your new car, you may not be able to if you owe more on the loan than the car is worth. A larger down payment ensures this doesn’t happen.

5. Pay for taxes, fees, and “extras” with cash

Do not finance the miscellaneous expenses involved in your vehicle purchase such as sales tax, registration fees, documentation fees, and any extras you choose to purchase like extended warranties.

Often, dealers are more than happy to roll some or all of these fees into your financing. Unfortunately, doing that just ensures you’ll be upside down on your car loan, at least for a while, since you’re increasing the amount of your loan but not the value of the car securing the loan.

Other considerations when financing a car

Gap insurance

Gap insurance (guaranteed auto protection insurance) is something car dealers and lenders sell you to cover the “gap” between what an insurance company thinks your car is worth and what you owe on your car loan in the event you’re in an accident and the insurer declares the car a total loss.

Without gap insurance, your auto insurer will only pay book value for the car, regardless of what you owe on the loan. If you crash your car and still owe $12,000 on your loan, but the insurance company only covers the car for $10,000, you’re responsible for paying back the $2,000. (And you’re without a car.)

People buy gap insurance out of fear because nobody wants to owe a couple of thousand on a totaled car. But if you structure your car loan correctly (put money down and stick to a three-year term), you can feel confident that you won’t need gap insurance because your car shouldn’t be worth less than what you owe.

Prices for gap insurance vary widely (from $30 or so a year to over $600 for the term of a car loan). The policies the dealers offer may be the most expensive, so if you feel like you need gap insurance, contact your auto insurance agent.

When to refinance a car loan

Let’s say you didn’t see this article in time and got stuck with a really bad car loan. No big deal. If your credit is good and your car isn’t too old, you should be able to refinance your car loan just like you can refinance a mortgage.

It’s easy to get auto loan refinancing quotes online with no obligation. LendingTree is a trusted site that offers four to five quotes with one easy application. A local credit union is also a great place to check out options for refinancing your car loan.

Wherever you go, ask about any fees for applying or initiating the loan and avoid lenders who want to lower your monthly payment by extending the term of your loan. With an auto loan refinance, you want to get a lower interest rate and pay down the loan over the same or a shorter term.

Summary

Unless you’re looking at 0 percent or another really low APR, the best way to buy a car is with cash. If you have to get a car loan, be as pragmatic as possible.

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About David Weliver

David Weliver is the founding editor of Money Under 36. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 36.

  1. Jake says:

    I always get preapproved from a local credit union before I go car shopping. I have never had an interest rate over 2.76%. I tell people that and they don’t believe me, but then I help them do this when they go to finance a car and they also have never had interest rates over 3%. You can doubt it all you want, but that doesn’t mean it doesn’t work.

  2. Archie Harvey says:

    Amazing Article on Car Finance Checker for bad credit and I really appreciate it for sharing this Article is very informative and helpful Thanks more Article share us

  3. hana lantran says:

    I agree; but possibly taking a cash advance on OP’s credit card instead might not trigger a credit check by the card-issuer.

  4. Alice J Marti says:

    Nice Post! Great knowledge and content you shared to keep the users updated. Keep Sharing the content on these great topics. Thanks a bunch for sharing.

  5. Joseph Thompson says:

    Great info! I really need this tip. I’m going to share this one. Thanks for this man!

  6. Margaret J Smith says:

    The really Informative content you shared. Smart Ways to finance the car loan. I really appreciate your efforts in writing this article. Thanks for sharing this valuable information.

  7. Nick says:

    What do you think about getting a long term auto loan (72 months or so), but paying more per month than what is required?

    For example, let’s say the required monthly payment is $400, but I pay $600.
    Would you still argue that I am better-off getting a loan for 48 months (or similar), and being required to pay $600/month?

    • Buddy says:

      There is nothing wrong with taking a car loan for the longest period, like 72 months, if the interest rate is not significantly different than the interest rate for a shorter period. As you note, you can always make a larger payment each month.

      For example, if the interest rate for a 48-60 month loan is 2 percent, take the 60 months. If the rate for 72 months is similar, say 2.3 percent, it might be best to take the 72 months. However, if the interest for 72 months was 4 percent, it may be best to stick to 60 months.

      Your example is spot on. Take the longest loan possible depending on the interest rate. Then, as you note, pay more each month. As a side benefit from this approach, should an unexpected event occur having paid the loan ahead would free up cash to address the unexpected event as you would not have to make a car payment for the number of months you are paid ahead.

  8. Chicos says:

    This article can help you discover which factors affect you the most and how to choose the best coverage for your personal auto financing situation. I love the following recommendations together with the other details that contains more informative details. Thank you so much.

  9. Greg D says:

    It needs to be mentioned that running out and applying for a bunch of different auto loans (or any loan for that matter) with multiple lenders (dealerships, banks, or other lenders) can lead to lowering your credit score since each hard inquiry on your credit account counts against you. If you’re on the edge of good to fair or fair to poor credit, taking that hit can make a big difference in the interest rate you receive forcing you to pay more in the long run.

  10. harrisonic says:

    I bought a new 2016 scion IM, with a sticker price of 20,500 roughly, and they tacked on 19,500 dollars roughly, I mean the total I’m paying for the car is 35,700 roughly. over 75 months I’m paying 300 a month for 75 months plus the 10,000 I put down which is 35,700, and also the 2,500 for the celica gts that was worth 4,500 roughly, was told id get 3,500 for it but I got a thousand less. i guess i get the gap insurance but what if i don’t want to pay 200000 dollars for a car i might not purchase. because i did not crash.

  11. Jex says:

    Wish I had read this before getting my first car at 20 years old. Luckily the car works great however, I realized a lot from getting my first loan on my first car. For one, the loan is for way more than the car is worth! The car is only $5,000 but the loan is for $9,000! I’m quickly paying it off now because I don’t want to be stuck with it for 3 more years. And then I realized that someone was dishonest with me in telling me 164k miles was low, but it isn’t I guess. My next car, I’ll defiantly be more educated and I’ll use this website to help me make a better decision because now I know more about cars and what I want. I’m defiantly saving up a lot for my next car and I’m going to be more particular about my next car!!!

  12. Katie says:

    I bought a car and put a 21% deposit down. The salesperson told me I really didn’t need GAP insurance since I was financing less than what the car was worth. Well, five days later I was hit in my brand spanking new car and the insurance has declared it a total loss. The insurance is also only offering me $2,000 less than what I financed based on a similar used car in the area (the only one for sale around here even close to what mine was). This car, however, has a different body (sedan vs. my hatchback) and 5,000 miles versus my 100 miles.

    The lesson I have learned: always purchase GAP insurance regardless of how much you are putting down. It’s the smart move and you will be prepared if something like this ever does occur.

  13. Gayle H. says:

    I have a question. I bought a 2010 Malibu in 2011 and paid around 19700 (includes a 2500 carryover from trade-in). I had payment extensions when I moved out of state (due to a new lesser paying job) to be near family. Now I have 29 months left on the vehicle at 16.49% interest rate and the balance is 14,777. I have the opportunity to take a lump sum from my retirement system to pay off the loan which will allow me to save the $423.48 payment each month.

    Is this a good thing to do? I am upside down in the car by $7,000 to $8,000 and my debt to income ratio is high.

  14. P Wallace says:

    Your article is very informative but in error on buying a car with cash, in my opinion.
    The best way to buy any auto is with 0% financing.
    Using the scenario of having your car totaled as soon as you drive off of the lot, or any point in time before the car is paid for.
    Your insurance company is responsible for paying off the totaled car and your cash is still in your pocket.
    It allows a transference of responsibility for the life of your loan, while allowing your cash to earn money. Even an interest bearing checking account allows you to come out ahead. Why would you use your money when dealerships will allow you to use theirs for free? Again if anything catastrophic happens to the vehicle you are still able to get a new loan for another car while still having cash on hand.

  15. James Henson says:

    Whenever possible, it’s best to get your auto loan before you walk onto a dealer’s property. When you already have an approved loan, you may as well have cash in hand, cash you can take with you and walk away if you don’t like the way things are going.

  16. T. Brown says:

    Great post, David. I maintain a blog for an auto finance company, and we’re always trying to talk people into getting an affordable, reasonable vehicle with 10-20% down and the shortest term possible. Unfortunately, we see so many consumers who have “the fever” – they NEED this or that new car. They’re myopically-focused on the monthly payment, and nothing else: not how much total interest they’ll pay, not how much risk of negative equity they’ll have, and not how long it will take them to pay off the vehicle. The result can be defaults, repossession, and wrecked credit. Pre-arranged financing, which as you said is a big bargaining chip, also minimizes the risk of rate-padding, where the F&I guy tells you you’re approved at 9.95% APR, when the lender really approved you for 7.95%, and he gets to keep the profit. Great post all the way around. I couldn’t agree more with your recommendations here.

  17. Y.K. says:

    One more thing. My friends told me buyers can cancel entire car contract within 48 hours. I asked the bank. They were not sure
    I don’t want to cancel my contract.I just want to cancel my loan contract which they offered 5.8%. Now banker told me that they could give me 3.5% flat. They just wonder if the loan manager asked me to pay early cancelation fee.
    Because I just bought a car Saturday afternoon(which is yesterday). Then, I would like to cancell current loan on Monday aftter 3:30. Do I need a cancelation fee? or I don’t need.
    Bank told me that if a dealer asked for cancelation loan fee, just paid. They will cover. But my friend told me that just leave the current loan which is 5.9% and pay entire using my new loan when it’s time to pay my first month car loan payment.

  18. alex g. says:

    The information on this page was really helpfull thanks for clearing my confusion with financing

  19. courtney says:

    this article was much needed thanks. learned alot

  20. Kyle says:

    I got a pre-approval from my local credit union for 2.09% for a used car (I ended up getting a two year old model). When the salesman said that 3.5% was the best possible rate and it couldn’t be beat, I had a hard time not laughing. I didn’t need to negotiate with the dealer, but it felt a lot better walking to the dealership knowing I held some cards that they didn’t know about. When I first considered buying a car, my plan was to pay off the car as soon as possible or even pay cash, but with such a low interest rate (likely lower than inflation over the next four years), I’m planning on not spending an extra cent on this loan and instead concentrating on paying off my higher interest student loans (highest are at 6.8%) and starting an investment account.

    Another thing I haven’t seen mentioned: how will you pay to repair that car. This topic fits into the topic of financing in part because the dealership may try to roll an extended warranty into your loan. The salesman of course laid it on thick about how horrible it will be if the engine dies and you have no warranty, but my research (and common sense, since the warranty is a major source of their profit) revealed that most such warranties end up being bad investments. Instead of putting the extra $1100-$1600 on a warranty (and instead of locking myself into getting repairs at this particular dealership), I’m setting aside an extra $100 per month into savings as a car repair fund; if it’s never depleted from car repairs over the course of the car’s life, I’ll be able to roll that over into the cost of the next car.

  21. Kevin says:

    Well my name is Kevin. My first credit card was opened 1 year and 3 months from now and I have a 670 fair. credit score. Awesome right? for this short time.
    I’m looking to buy a used suv in about 3 months and I will try to make my credit go up to 700 this 3 months. I have 4 credit cards revolving.
    In 3 months I will try bank loan before hitting the dealer.
    I know that you can apply for a home loan or car loan a couple of times between a 30 day period and it will appear in the credit report has only 1 time.
    Thats good to know for everyone to make a good research without fearing your credit will go down.

  22. Mike Munzo says:

    Hi, I recently Bought A Luxury vehicle in a Pasco County Dealership in Florida, I had already been approved for $xx.xxx amount at 3.99% Interest for up to 72 months. I arrived at a Dealer near where I live and inquired about a recent Model Luxury Sedan by a Korean Automaker. Test Drove the vehicle, loved it!, negotiated the price and a good trade in price for my vehicle. As I was about to fill the Blank check that the bank had provided me after being approved, a finance person from the dealership approached me and stated that he could get me a better rate depending on my credit, so I filled a credit app and the finance agent returned with good news, stating that he had me approved for 0.5% less than my bank gave me (3.49%), I agreed and stated that my FCU offered me gap protection for a 1 time fee of $300.00, the finance person stated he would meet that price for gap insurance, 2.5 hours later, I was told that the vehicle and paperwork were ready. The finance agent laid all the printouts on top of each other and asked me to sign each form while explaining what i was signing, though he never showed me the bill/invoice with the totals, he just covered the top and right of the page and asked me to sign, I did, the Finance agent cut out all the copies and folded them into an envelope, it was late at night almost 10:20 pm after I had signed all docs, I asked for the bill and was told it was signed and inside the envelope, as I walked towards the sales agent the finance agent got in his car and left in a rush, I was suspicious of his behavior and decided to check the paperwork when i got home, the agent had charged me an extra 1% interest (4.49%) and charged me full retail on the gap insurance ($650). I have been speaking with the sales and finance managers w/o any progress, I had to contact the automakers finance dept to see if this can be rectified, the sales agent went to my defense stating the rate and conditions that I had demanded and had been offered were true / accurate and the dealership threatened to fire him if he didn’t side with the company that pays his salary. The lesson here, nobody will look out for your interests better than yourself, so take your time and be aware that your loss is their gain and they are out to take as much money as they can from you, least pleasant vehicle purchase ever!! I will never buy another Hyundai vehicle from New Port Richey Hyundai ever again!!

    • Gordon Walker says:

      Hey, I had a similar experience at this same dealer with a Hyundai Sonata Turbo, I was fortunate enough to double check all the docs before I left and noticed that the finance dept had also increased the rate, the extended warranty and the tire pack warranty on my vehicle to almost $1100 above what had been negotiated + the the difference in the interest rate, when I called them on it the finance guy seemed annoyed and blamed keyboard error. I stormed out of there and bought the car at another Hyundai dealer, which apologized for the inconvenience and offered me a better deal due to the other dealers behavior. I was even encouraged to report them with the manufacturer. BTW 2011 Sonata Turbo is awesome. I hope more people read this and look back and compare what they negotiated vs what they paid and I am sure discrepancies will abound. GW

      • Y.K. says:

        I hope someone helps me the answer my question.I
        I just bought a car which is brand new car with just Hail damage. I had 34% discount. It is a good deal. I have lower 700 credit score according to dealer. Credit comma shows upper 700. I don’t know why they are different.
        Dealer and one unknown woman try to convince me to get warrenty. (How I was stupid to trust this totaly unknow woman). Anyway, I signed 3000 more money on my contract for warrenty. I was upset with this result. I met my friends, they told me tI should cancel. I canceled the warrenty . Thank God. I just found this site.After I read Mr. David Weiler’s article, I feel like I shouldn’t have 5.9% car loan with 7 year payment.
        I put 20% down payment on my car. One of teachers at my school got 3% with mid 600 credit score. I asked them how I got almost 6% rate.They said my car has hail damage. That is why my intereste rates goes double.
        I checked this under 30 site. Mr.David said I can go local credit union> I might go to the bank I have account. I still want to get this car. I love this car. It is a very good car. So now my current situation is I bought a car and put 20% down with 5.9% rate because the car has hail damage. Some said I can even cancel my contract within 48 hours. I do not wish. I just want to know if I can get better car loan with this situation.

  23. German says:

    Just a question….very informative by the way….but If I were to pay cash up front for a brand new car from a reliable dealership should they waive off the sales tax in ny and doc fee?

  24. Tomas says:

    Thanks for this article,David. I agree with the short term. I never getting car credit more than 2 years, if I can make a years I will do it even with higher payments per month.

  25. Rob says:

    i do auto loans at a local bank and i almost always recommend going through a dealer. For used cars, some banks will only loan up to 80% of the selling price, minus TT&L. if you’re fortunate enough to have 20% to put down then that’s great, but in this ecomony I find that to not be to the case.

    if you currently owe on a vehicle and want to roll the remaining cost into a new vehicle loan, we won’t do that either, so make sure if you go shopping on your own, you ask these kinds of questions.

  26. Donald says:

    Some thoughts –

    Buying a car is actually quite simple. All that is needed is a bit of knowledge and an understanding the buyer is in complete control at all times. A buyer can walk at any time. Dealers know this and a savy buyer will use this to his/her advantage.

    A savy buyer does not really need to worry about depreciation if the buyer buys at the right time. That time is when dealers are willing to deal. I have purchased many vehicles, usually one a year, for the past five years Each vehicle was purchased at or below the posted dealer invoice. Buying low covers much of the depreciation.

    A savy buyer would not put anything down on a vehicle. First buy at the right time. Second buy a vehicle which has a good manufacturer finance rate. Putting money down on a vehicle only saves interest. If the buyer gets a low interest rate, or better a zero percent rate, putting money down doesn’t save much. In any case, by not putting any money down the buyer would have the money in the bank, which is better than having the money in the vehicle.

    Regarding interest rates. I have always researched (once again) available finance rates. I have never found a dealer not willing to beat the best interest rate I was able to obtain on my own. Dealers make money off the financing (in many cases) and will do anything they can to get the buyer use their financing. There is nothing to lose by letting the dealer have a shot at the financing. If the bank offered 5 percent, the dealer might come back with 4.5 percent. A buyer will never know unless they ask.

    A savy buyer should always consider the monthly payment. The key is for the buyer to come up with the monthly payment for his/her terms for the desired vehicle. This is down via research. The buyer researches the selling price of the vehicle, arriving at his/her desired price. The buyer researches the value of the trade, arriving at his/her desired value. The buyer researches finance rates, arriving at his/her desired rate. The buyer than uses one of the many on-line calculators to determine the monthly payment using the desired selling price, trade-value, and finance rate.

    It really does no good to “hide” the trade. Dealers are not stupid. To the dealer, all three factors (price, trade, finance) are part of the same deal. The selling price and the trade are not, as too many so-called experts suggest, two different deals to the dealer.

    A savy buyer does not really need to be concerned about how the dealer structures the deal. Of course in many states a tax break is available for the value of the trade, so having the dealer increase the trade value which is offset by an increase in price would actually benefit the buyer by lowering the amount of sales tax required. A sale to a private party or Carmax eliminates this savings. This can be a significant consideration if the value of the trade is high.

    If the buyer has done his/her homework correctly, the buyer will know a good deal (different for every buyer) by the monthly payment. If the buyer computed a monthly payment of $400 and the dealer comes back with $425 the buyer might conclude the deal is not acceptable.

    The final bit of advise for any buyer is to simply say NO to anything and everything offered in the F&I department. Anything offered can be purchased later from other sources for a much lower price. It is always better to take time to consider the various items offered in F&I. How many times have we all bought something at the moment and later wished we had not.

  27. Louis Rix says:

    Hi David, great post. I couldn’t agree with you more. I’m writing from 10 years experience from working in the car finance industry in the UK and my advice to people is to always purchase a car that is a few months old or older as with new cars you get hit with a large chunk of depreciation as soon as you drive it off the dealers forecourt. Businesses may wish to lease vehicles as it suits them but for personal usage I’d definitely finance an amount over 36 months or 48 months if the repayments on 36 were too high. A large cash deposit is always a bonus if you have it but always try and put in 10% minimum. My last tip would be to barter with the finance company to get the best deal. Say you’ve been offered a slightly better rate from another finance company and then you’ll see how much they want your business

  28. Naveen says:

    I really liked these tips. I too buy only the used car and for the same reason which you have outlined. Two of my used cars have lasted more than 5 years and i bought these at pretty low prices after hard bargaining. Personally, i do not like monthly commitment since my balances keep fluctuating widely.

  29. JoeSchmo says:

    Great information on this blog, David.
    I have another tip for car buying. Take a loan for 5 years, but do your personal amortization table to pay it off in 3 or less. This prevents a high monthly payment strapping you down if there are any unforeseen expenses.
    Also, many dealers give a larger discount on the price of the car if you agree to finance for a longer period.
    If you have to finance, and are disciplined, you can often end up paying less at the end of the loan.

    • Chase says:

      Ultimately, I think buying a used car with cash is always the best alternative.

      If you must have a new car, then I think paying with cash will always get you a better deal than financing because you should be able to get the sale price of the car lower than you would if you were financing.

      If you must buy a new car and finance it, I think Joe, here has the right idea. Obviously, weigh the incentives first. Before I understood the beauty of buying a used car, my wife and I bought a new car on a loan. Her uncle works for Nissan so we qualified for the “Family discount” and didn’t have to haggle the price to get the best they could give me (supposedly). I took a few finance classes in college and knew how to calculate NPVs and such. I also had really good credit. The dealership had two incentives, either 0% interest or $2000 cashback (something like that). The standard rates I was qualified for were something around 3.5-4.5% depending on the term of the loan. We eventually decided to take the cashback with a 5-year loan. The $2000 cashback gave us instant equity in the car and we paid at the 4-year rate. Eventually we picked up steam and paid it off in about 2.5 years.

  30. Darryl Memering says:

    If I can finance a car at very little to zero percent I always do. “GAP” is a beautiful thing. If you pay a car in cash, esp a new one, and it is wrecked or stolen you are out anything that the insurance company deems over the cost. 150 dollars and small interest rate is worth it since I live in a town full of blue hairs that basicaly drive until they hit something. I know a couple people that have been stuck with 1500-3400 worth of car payment… and no car.

  31. Jerry halls says:

    Good post, I have just purchased a new car by loan. I think it is much better to take a loan rather then purchasing the car on direct cash. Loans are better since you do not feel the load of repaying it as it has EMI system.

  32. Simon Norman says:

    Cathy, thanks for the good comment. I agree that comparing different financing alternatives is quite difficult because it’s not just about the APR which is what people typically look at.

    David, I can understand why you can disagree with me, but I think the answer is that it really depends on one’s circumstances. I hope that you would agree that monthly payments on a lease are usually cheaper because you are only paying for the “use of the car” instead of the full asset. Also, you can get very interesting offers on leases because there is more margin in it for the dealer or finance company. If you combine these 2 factors, you may end up paying a relatively low monthly payment to drive a much better car that paying it on finance and you can then switch to an even better car when you get a pay rise 2 or 3 years later! I think this is particularly relevant for young couple who usually need to upgrade cars as the family grows.

  33. Cathy Aron says:

    David I am inclined to agree with Simon about investigating a lease. Most people have a misconception about how the numbers wash out in the end. If you compare a lease with a bank finance, side-by-side, you may find it quite attractive. It takes an experienced F&I Manager to review the comparison and consider all the “what-if” factors. For example, the used vehicle market took quite a tumble last year, particularly the fuel guzzlers. Anyone leasing one of those vehicles that came off lease last year was thrilled that they didn’t have to take ownership of a vehicle that was worth thousands less than they would have owed had they financed…even if it was 0%.

  34. Johanna says:

    We got approved for an auto loan from our credit union before we set foot in the dealership, and got a decent rate. When the dealer found out we were planning on financing with someone else, they beat the rate.

    Now, almost two years later, the credit union will beat the rate we got from the dealer, so we’re switching and will lower our monthly payment. I’ll put the difference aside and then have more than enough for insurance when that bill comes due every six months.

    The plan, once this car is paid off, is to keep “paying” the regular payment every month, into a dedicated savings account. Then, when the time comes around again for a new car, I’ll be able to pay cash, and won’t really have felt the pain of saving up the money.

  35. David Weliver says:

    Unfortunately, Simon, I couldn’t disagree with you more. Unless it’s for business purposes, leasing a car just makes bad financial sense: you pay out thousands over the two years of monthly payments but have nothing to show for it at the end (lease buy-out options are typically awful deals). New cars may depreciate, but at least when they’re paid off you still have transportation.

  36. Simon Norman says:

    This is a great article, but I think it should also be mentioning leasing a car as an interesting alternative to financing a car on a personal loan. Car Leasing addresses partly the issue of car depreciation as it enables you not to own the asset (ie the car) which depreciates so much over the initial 2 years. It also makes it much easier to change car regularly as one grows older and has different needs.

  37. RainyDaySaver says:

    Excellent thoughts. We bought a car with a little less than 20% down, negotiated a fair price, and got 0% down, so at least we’re not paying interest on it.

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