Arrange for financing first
If your answers from Step 1 indicate that buying that new vehicle is best for you, then this page is for you. If leasing is your best choice, then continue to the leasing section.
Before spending hours, days or weeks researching, pricing, test-driving, and haggling over the price of a new vehicle, it's recommended that you explore the financing of the vehicle. And don't assume that dealer financing is your best deal unless you've checked out all the other options.
It is suggested that you arrange your financing first before you start shopping for a car. Most people know that it's easier to just let the dealer handle it, but it's not always in your best interest. Dealers can make a lot of their money on financing. They have deals with lenders, often arranged so that the higher the interest rate you pay, the more money the dealer makes. It's what they call their "back-end' business and it is highly profitable.
Therefore, it's important to understand the financing process so that you are better able to shop for a loan and ask the right questions before your sign on the dotted line. This should help you find the best rate, and avoid being "upside down" in your loan.
Where to get the money
Seven out of 10 new cars and trucks are financed, and you can also finance the purchase of a used vehicle. However, to do the financing right, you need to be prepared before and after you reach the dealership.
You can get a vehicle loan from a bank, credit union or almost any financial institution. You typically don't have to have an account with that institution, although it will often save you 1/4% to 1/2% on the interest rate if you do have an account. Likewise, having the monthly payment automatically deducted from a checking or savings account will usually save you another 1/4% to 1/2% on the loan rate. Make sure you factor these things in when you investigate the various financing options. The real intent here is to basically get prequalified for a loan before you visit the showroom, not only to make sure you have the best financing option but also to make sure that you qualify for the vehicle you are considering.
You can also get financing through the dealer or from the vehicle manufacturer (e.g., GMAC). It's possible that dealer/manufacturer financing will cost you more, but it isn't always true so it pays to do your homework. There will be occasions where a dealer will actually give you a better deal. Unfortunately, these occasions are not predictable (despite endless "must sell," "lowest rates possible" and "no money down" advertising by dealers) and the only way to be sure is by comparison shopping.
Interest rates on new vehicles are lower than those on used vehicles. Generally, new vehicles can be financed over longer terms than used ones. It's quite often the case that a new vehicle could be cheaper than a used one if the financing terms are right.
Not all the numbers in your financing deal will be locked in before you buy, especially if you go with dealer/manufacturer financing. The interest rate you pay can vary, depending on the length of your loan and especially your credit. Although a dealer might quote you a manufacturer rate (e.g., GMAC 8.5%), that doesn't mean that you are being offered the best rate. If the finance manager can charge you an extra 1% or 2% and you take the deal, that's more money in their pocket. Also, they have the upper hand when it comes to the value of your trade-in, which is another area where you can lose if you haven't done your homework.
The best way to protect yourself is to know your numbers . Be sure, every step of the way, that you know just how much you are paying, when, how and what for! Read -- and be sure you understand -- every word of every document you sign or initial.
Also keep in mind that time is money when it comes to financing -- meaning that the longer your loan term, the more it will cost you. Some lenders are offering loans that run to 72 and even 84 months. While this may lower the payments, the interest rate will be substantially higher than even a five-year, 60 month, loan and this will cost you much more in interest. Also, the longer the loan term, the longer it will take you to reach a point where you're no longer "upside down'' on your loan, meaning you owe more than the car is worth.
Lastly, don't fall for those ads that say, "We'll pay off your car no matter how much you owe!'' What this means is that they will take what you owe and add it to the cost of your new vehicle loan, making it even more expensive. So that new $25,000 car you just bought could carry a loan balance of $28,000 to cover the $3,000 you still owed on your old car.