Apart from a house, a Car is one of the most expensive things you can buy today. So figuring out financing is one of the first steps towards buying a car. Learn How To Finance a Car The smart way in 2024?
If you’re in the market for a new car, don’t wait until you’re signing the paperwork before thinking about how you’re going to pay for it.
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One 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, let’s say you talk the dealer into taking $3,000 off the sticker price. Awesome work! Right?
However, capitalizing on your excitement, the dealer tricks you into putting $0 down. Then stretching your Car Loan Term from three to four years to keep monthly payments low.
That might sound great on paper, but in reality, you’ll end up paying $4,000 more in interest alone.
If you’re willing to negotiate the price of the car, you shouldn’t ignore the rates and terms of your car financing.
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Am sure majority have made this mistake the first time they 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.
Review these Time-Tested Steps now to save a ton of money by the time you drive out of the dealership in your new wheels. Check also how to finance a car through a credit union
How To Finance Your Car The Smartest Way in 2024
1. Buy A Car You Can Truly Afford – How To Finance A Car Through a Bank
Unless you buy a Rare Ferrari, your car is not an investment, it’s a depreciating asset.
In fact, most cars will lose half their value in five years. Most luxury and sports cars depreciate even faster.
That’s why you generally want to pay off your car as soon as possible and how to finance a car with no credit.
Dealers will try to talk you into some combination of:
- A low down payment,
- Low monthly payments,
- And long loan terms (four, five, even six years). Why?
Because they and their lenders will make tons of money off of you in interest that way.
The longer you take to pay off your auto loan. The higher the likelihood that your car will go “underwater” or “upside down,”.
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Meaning you owe more on the loan than the car is worth (also known as ).
That’s an awful place to be. Because even if you sell the car tomorrow, you’ll still owe thousands on a car you don’t even have anymore.
That’s not to say that all auto loans are bad.
Most of us use cars to get to our jobs and don’t have the cash lying around to buy a reliable ride, so we need a car loan. That’s totally cool!
But the key difference is this: An auto loan should help you get a car that you can afford, not one that 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 dealer will tell you. You can afford for dealership financing and what you should spend are two very different things.
2. Try To Keep The Term As Short As You Can Afford
A shorter loan term means higher repayments – which is exactly what you want. In general, the longer it takes you to repay a car loan, the more interest you’ll pay.
It can be tempting to stretch out your loan repayments over a longer period of time. Effectively making your monthly repayments cheaper. But you’re also paying more in interest for a depreciating asset.
Regardless of your Credit Score. A dealer will always try to sell you low monthly payments. Zero down, and long car loan terms of four, five, or even six years.
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This is the opposite of what you want.
Lower monthly payments are a manipulative and old-as-dirt sales tactic. Dealers like them because they:
- Confuse buyers and pacify negotiations.
- Create breathing room to sell you extras.
- Make it seem like you can afford more car than you really can.
- Please their lenders since they’ll make gobs of interest off of you.
- Make it seem like you’re getting a deal (when you’re actually getting screwed).
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 loan interest.
The longer you take to repay a Car 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.
It’s tempting to stretch out an Auto Loan to over 5 or even 6 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.
3. Put 20% Down Payment – How To Finance A Car With No Credit in 2024
Avoid owing more than what the car is worth. By putting down the biggest car loan deposit you can afford – particularly if it’s a new car as it will depreciate quicker than a used vehicle.
Typically, an initial payment of 20% or more of the purchase price is a good place to start. So if you’re buying a $25,000 car, a 20% deposit is $5,000.
In addition to shortening the term of the auto loan, you also want to minimize the principal.
The “principal” of the loan is the total amount you borrow, and thus have to pay interest on.
When a dealer offers you a loan with zero down payment. They’re basically saying let’s maximize your principal so that my lender can charge you more interest.
Don’t do it!
Make at least a 20% down payment on your new car so that you can reduce your principal and thus the total amount of interest you’ll end up paying.
If you can’t afford to put 20% down before you take a loan out. Chances are you won’t be able to afford the monthly payments plus interest over the course of the loan term itself.
4. Before You Go To The Dealership, Check Your Credit Score
Paying off your debts and making payments on time can improve your credit score over time. And a good credit score can lower the amount of interest you’ll pay on your car loan.
Your credit score can also impact the type of car loan you can get. Having a good credit score can make you eligible for some of the upper-tier car loans and a higher loan amount.
The first step to securing an ideal is to check your and Score. You can do so right now, and for free, via Equifax®
Dealerships will often advertise very good interest rates on new cars: 2.9%, 1.9%, sometimes even 0%.
What they save for the fine print is that these rates are only available to with the Best
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Dealers and Banks will still “give you” a if you have a Poor C.
That’s because they know they’ll make tons of interest off of you, and if you don’t pay, they can just repossess it while you’re inside Trader Joe’s.
Buyers with scores in the low 700s can still get a But they may not qualify for the best promotions.
And rates rise quickly for scores below 700.
If you’re a borrower with a below-average (under 650), you may be presented with rates of 10% or more.
5. Your Credit Score Isn’t Perfect, Get Financing Quotes Before
If you have an Excellent Credit Score (750+), you can usually get the best financing rates right from the dealership.
I’ve literally never said this before in all my time at Zerox24, but in this case, you really don’t need to pre-shop around for the best rates.
This is because the dealer themselves will serve as a broker and show those with the best options across multiple lenders competing for your high- patronage.
The tables are completely turned when you have a poor , though.
You’re the one the dealer will take advantage of, and you certainly won’t qualify for anything near “good” when it comes to rates offered at the dealership.
In this case, you should thoroughly research rate options online before you go to the dealership.
Rates available from online lenders and/or the usual credit union/bank you work with are likely more competitive than the in-house rates the dealer will throw at you. Leah how to finance a car with no credit.
6. Compare Dealer Finance Against Lender Rates
In the excitement of buying a new car, some people forget one small (but very important!) detail: how exactly to pay for that set of new wheels. Get to know how to finance a car through a bank.
Unless you have a spare $30k sitting in your back pocket. There are two options:
- Dealer Finance or
- A Car Loan From a Lender.
Dealer Finance is when the dealer contacts their bank or lender of choice and helps to arrange a loan for the car. They make all the arrangements while you do very little. Sounds ideal!
The other option is when you (the car buyer) applies for a car loan from a lender like Bank of America. or any other local bank you know.
You arrange the details of the loan yourself, and use the money to purchase the car from the dealer.
Dealer finance may seem like a no-brainer because it’s more convenient.
But dealers may markup the monthly repayment to pocket a profit. Some dealers offer their own interest rates which can be a markup on the bank’s rates.
See how much your monthly Car Loan Repayments could be by using our Car Loan Repayment calculator.
7. Don’t Fall For The Gap Insurance Speech – How To Finance Car The Smart Way
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.
Let’s say you crash your car.
The insurance company pays out $12,000, but you still owe $14,000 on the loan. Gap insurance would cover the remaining $4,000.
The thing is, if you structure your auto loan properly with a 20% down payment and a short. Three-year term, you shouldn’t need gap insurance.
With good loan terms, there should never be a scenario where you’d owe more than the car is worth.
So if your dealer is really pushing you for gap insurance. That might be a sign that your loan terms need re-evaluating.
8. Don’t Buy Any Add-Ons At The Car Dealership
If you’ve bought a car, you know how this works.
You’ve been at the dealership for hours, you’re tired, you’ve settled on a price. You’ve haggled over the trade-in — then you get handed off to the finance manager.
“You’re led to this back office. They’ll often refer to it as the box,” says Van Alst.
This is where the dealership will try to sell you extended warranties, tire protection plans, paint protection plans, something called gap insurance.
Dealerships make a lot of money on this stuff. And Van Alst says it’s often very overpriced and most people have no idea how to figure out a fair price.
“Is this add-on, you know, being marked up 300%? You don’t really know any of that,” Van Alst says.
So he and Reed say a good strategy, especially with a new car, is to just say no — to everything.
He says especially with longer-term loans, there’s more wiggle room for dealers to try to sell you the extras.
The finance person might try to tell you, “It’s only a little more money per month.” But that money adds up.
9. Pay For Sales Tax, Fees, and “Extras” With Cash – How To Finance A Car in 2024
There are many miscellaneous costs that come with a car purchase, like:
- Sales tax.
- Registration fees.
- Documentation fees, and
- Any extras you want like extended warranties.
If you roll these fees into your financing, you’re increasing your loan amount but not the value of the car securing the loan.
Not sure whether to pay for your car with a loan or cash? Read our guide on Financing a Car vs Paying For Cash.
Exhausted by your shrewd negotiations and preparedness.
The dealer may still try to roll miscellaneous expenses into your financing options. These may include their dealer fees (~$900), taxes (~8%–12%), extended warranties, and the cost of optional extras.
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For example, they probably know that a $3,400 infotainment system upgrade is a hard sell. So they’ll say “upgrade your infotainment for just $20 per month.”
Sounds innocuous, but you might end up paying $1,000 in interest or $4,500 total on that friggin’ screen alone.
Asking for an itemized invoice for all of these expenses, and paying cash, ensures a few things:
- You won’t pay $1,000+ in additional interest.
- The dealer will have a harder time hiding BS fees from you.
- You won’t pay for extras that you don’t truly want/need (like a 13” vs. 8” screen).
When negotiating. Always ask for the “Out-The-Door Price” — this is code for the bottom-line, no-nonsense price of the vehicle. Then discuss finance terms. This is how to finance a car with bad credit.
10. Speak To A Lender Before You Walk Into A Dealership
By speaking to a lender, your assets, liabilities and credit rating would be assessed to find out if you’re qualified to get a car loan for a specified amount.
Walking into a dealership with pre-approval can Speed Up The Buying Process as both parties know you have a fixed limit. So there’s less chance of getting a dodgy deal.
Not sure if you should only buy from a car dealership? Read guide private sellers vs car dealerships.
11. Don’t Buy Too Much Car – Consider a Used Car To Save Money!
“The golden rule is that all of your car expenses should really be no more than 20% of your take-home pay,” says Reed.
And he says that’s total car expenses, including Insurance, Gas and Repairs. “So the car payment itself should be between 10 and 15%.”
And if a new car with a five-year loan doesn’t fit into your budget, you might decide you don’t really need a brand-new car. This is how to finance a car from a private seller.
“We’re actually living in a Golden Age of Used Cars,” says Reed.
“I mean, the reliability of used cars is remarkable these days.” Reed says there is an endless river of cars coming off three-year leases that are in very good shape.
And even cars that are older than that, he says, are definitely worth considering.
“You know, people are buying good used cars at a hundred-thousand miles and driving them for another hundred-thousand miles,” says Reed. “So I’m a big fan of buying a used car as a way to save money.”
12. Look Towards Car Refinancing In The Future
Finally, what do you do if you cant follow all these smart financing steps? For example, what if you have to buy a car before you have time to improve your credit score?
In this case, start off by doing the best you can. Buy an older, cheaper car, for one.
But then keep an eye on your credit score and auto loan rates. You may be able to refinance in the future.
And if you can trim your interest rate by a few points, that could be well worth your while! How to finance a car without a job.
Conclusion on How To Finance a Car Through A Credit Union
Unless you’re looking at 0% or another really low APR (). The best way to buy a car is with cash.
If you have to get a car loan (whether that’s a or ), it literally pays to be as pragmatic as possible.
Check your before going in to the dealership.
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Then try to use those offers you found as leverage to get the lowest APR possible from the dealer.
They may or may not drop their rate when presented with a competing offer, but at least you tried.
These steps will improve your chances of.
If during your research process you realize that you can’t really afford that cool you were eyeing…well, better to learn that now than after you buy it!
So there you have it.
These are the steps you should take to finance your car the smart way. Do you have experience with this? Let us know in the comments! Learn more how to finance a car through a bank.
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