Financing a New Car


If you have your heart set on a shiny, brand new car, arrange the best financing before you even take a test drive!

By Gary Foreman

 Unless you pay cash for a car, finding the best auto loan could reduce the cost of the car by up to five percent.

Why Shop for Financing First?
Start looking for a loan before you set foot in a car dealership. The local credit union or bank is likely to have better financing.

This depends, of course, on the car. In these days of high gas prices and a lot of cars in inventory, the car dealer may have a good financing program, too.

It's wise to get a copy of your credit report before doing anything else. If there are errors, you can correct them.

There's another reason to shop for a loan before the car. The signed deal to buy the car probably includes a "subject to financing" clause, which means that you haven't really bought the car until you arrange financing.

Start at the Bank
When you go to the bank, tell them how much you'd like to spend. They'll check your credit, propose an interest rate, and tell you what your payments would be. Have the interest quoted to you as an Annual Percentage Rate (APR) so that you can compare offers.

Write out a list of questions for the loan officer. A loan agreement isn't a simple document. Some seemingly minor clauses can be expensive later. For instance, find out what happens if you want to pay the loan off early.

Time to Negotiate
Now, it's time to negotiate. Most newspapers list the rates charged for auto loans by different banks and credit unions. Ask the bank if they'll match the lowest rate on the list.

Don't concentrate on getting the cheapest monthly payment. A lower payment could hide the fact that you're actually paying more for the loan. Your goal should be to get the lowest APR.

On a 48-month, $25,000 loan, a two percent difference in APR will cost an extra $24 each month. That's a difference of $1,142 over four years. And, depending on your credit history, rates can vary by three or even four percent. That's a lot of money to give away.

Make sure that you know how many payments you'll make. Remember that a loan can cost more even if the monthly payments are the same. All the lender needs to do is to make the loan last longer.

Avoid balloon payments, even if offered. They're a disaster waiting to happen, particularly in today's economic climate. Sure they'll lower your payments now. But if you can't afford a higher payment now, where will you get the money to make the bigger balloon payment later?

Credit insurance is not required by federal law, plus it's expensive. Negotiate with the lender. Some may require it. But, if your credit history is good you can always look for a lender that's more flexible.

Don't forget to check out any credit unions that are available to you. Often their rates are better than banks.

When the finance papers come back to you, read them before signing. It's not uncommon for them to change the interest rate and conveniently forget to mention that fact to you!

Finally, Visit the Dealer
Once you've found good financing, it's time to find a car you like and negotiate a price with the dealer. Your advance work will put the dealer in the position of having to match the well-shopped financing that you've already arranged.

Generally, dealers don't actually loan you the money to buy your car. They sell the loan for a bank or finance company. They're paid based on how high the interest rate is. The more you pay, the more they make.

Perhaps they'll have something better. If so, great. If not, you won't find yourself stuck with overpriced dealer financing.


Gary Foreman is a former certified financial planner who currently edits The Dollar Stretcher Web site www.stretcher.com/save.html