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How To Finance a Car


If you've ever asked for advice on purchasing a car, you've probably heard people talk about haggling with the dealer over the sticker price. It's true that you can often afford a car that's slightly out of your price range with careful negotiation; however, another way to save is to pay attention to the rates and terms of financing. Plan ahead and compare rates from multiple lenders to ensure you're getting the best deal possible.

Tools like Monevo can help you compare rates online. Monevo includes data from over 30 different lenders and banks, and it's far from the only tool of its kind out there. Knowing what rates you qualify for can help you prepare to negotiate with car dealers. Keep in mind that what dealerships say you can afford and what you should spend are two different things, so have a number in mind.

Before you go into the dealership, check your credit score to find out the best car loan rate you qualify for. Dealerships advertise 2.9%, 1.9% and sometimes 0% interest rates on new cars, but those rates are available to buyers with a FICO score of 750 or better. If your credit score is in the low 700s, you won't get the best promotions, and if it's lower than that, rates rise quickly. Borrowers with below-average credit scores — under 650 — may be presented with car loan rates of 10% or more.

Shop around to get the best rate offered. If you know you have excellent credit, you can get the best financing rates from the dealership, which serves as a broker for multiple lenders.

If you don't have stellar credit, try online lenders. Complete a credit application and the lender will respond with your interest rate and a price ceiling. You don't have to use the loan if the dealership offers you a better deal, but if it doesn't, you have a fallback plan.

Local banks and credit unions can offer borrowers with average credit competitive rates. Use the prearranged financing as a bargaining chip with the dealership to score an even lower interest rate.

Consider the loan details

Keep the term as short as you can afford. Shorter-term loans come with lower interest rates but higher monthly payments — the longer you take to repay the loan, the more interest you'll pay. Many banks charge higher interest rates for longer loans, meaning you pay even more. If you stretch out the loan over five or six years to get a more comfortable monthly payment, you'll pay a lot more interest.

As a general rule, you should put down 20% of the car's value. If you take a low-down-payment deal and later find yourself suddenly needing to sell your car, you may owe more on the loan than the car is worth. A larger down payment ensures this doesn't happen.

Pay for taxes, fees and extras with cash. Don't finance such miscellaneous expenses as sales tax, registration fees, documentation fees or any extras you choose to purchase, like extended warranties. Dealers are happy to roll these fees into your financing, increasing your loan but not the value of the car.

Guaranteed auto protection insurance covers the gap between what an insurance company thinks your car is worth and what you owe on your loan if you total the car. If you don't spring for GAP insurance, your auto insurer will pay book value regardless of what you owe. That means that if you still owe $12,000 but the insurance company only covers the car for $10,000, you're responsible for paying back the remaining $2,000 — and you don't have a car!

If you structure your loan correctly, put money down and stick to a three-year term, you can be confident that your car shouldn't be worth less than you owe. But if you want gap insurance, know that the policies dealers offer are expensive. Instead, contact your auto insurance agent.

Unless you can secure a loan with an annual percentage rate at or near 0%, the best way to buy a car is with cash. If you have to get a car loan, be pragmatic. Know your credit score going in, shop for a loan before you go to the dealership and use these suggestions as leverage to get the lowest APR possible.

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Davis & Graves CPA, LLP
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Gresham, OR 97030
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