How to Finance a New Car

Do you have your eyes on a new ride? If you don’t have the funds sitting in a bank account, you’ll need to seek financing.

With the average cost of a new car around $35,000, you should shop around to find the best deal on a loan. (Source) Otherwise, you could spend hundreds, if not thousands more than you have to over the life of the loan.

Getting the Best Deal on Financing

Financing offers vary from lender to lender. Take these simple steps to find the best deal available.

Know Your Credit Score

The higher the credit score, the lower the interest rate. To illustrate:

Loan Amount Interest Rate Loan TermMonthly PaymentTotal Interest Paid
$18,0002.19% (Excellent Credit) 36 months$515$558
$18,0004.99% (Fair Credit) 36 months$539$1,418
$18,0008.99% (Bad Credit) 36 months$572$2,603

And in some cases, you may qualify for zero percent interest on your new ride if you have excellent credit.

Visit Credit Sesame to get a free credit score and report. Check all the items on your report are accurate. If you see a mistake that could be hurting your credit, ask the credit bureau to correct it immediately.

Don’t Settle for the First Offer

Some dealers offer tons of incentives on new cars if you finance in-house. But that doesn’t mean you should only apply with them.

Featured lenders for personal loans

Lending PartnerMinimum FICO scoreEstimated APR 
60015.49% – 34.99%*Apply
6802.19% – 17.49% (with AutoPay)*Apply
650Fixed:
5.49% – 14.24% APR (with AutoPay)*
Variable:
4.99% – 11.14% APR (with AutoPay)*
Apply
6605.99% – 35.89%*Apply
6204.93% – 29.99%*Apply
5809.95% – 35.99%*Apply
7005.25% – 12%*Apply

Explore loan products from other lenders before heading to the dealership. You can use SuperMoney’s auto loan comparison tool for your search. Remember, as long as you shop around within a 30-day period, credit score algorithms will consider all your credit requests as a single credit inquiry, which will reduce the damage to your credit score.

Have Your Trade-in Appraised

If you’re planning to trade-in your ride, have it appraised. You can also use Kelley Blue Book to get an idea of how much it’s worth. Print this information and bring it to the dealership in case they lowball you.

How Much Can You Afford?

The average monthly payment in Q3 of 2016 was around $500. (Source)  But that doesn’t mean you should be spending that much on a car payment.

Instead, use an auto loan calculator to gauge your affordability. And don’t forget to include other fees in your calculation. This includes the cost of taxes, registration, the extended warranty and other add-ons.

Finance Options

There are three ways to finance a new car.

Direct Lender

In this arrangement, you get a loan from a bank, credit union or other financial institution. The lender pays for the vehicle and manages the loan until you pay it off.

Pros
  • You’ll know what you qualify for before heading to the dealership
  • You could qualify for better rates on the strength of an existing relationship with the financial institution
Cons
  • More legwork when rate shopping
  • Minimal incentives compared to what dealerships offer

Dealer Financing

The dealer will shop your information around to it’s partners and offer you the best option. Upon approval, you will remit payment to the lender and be under contract with them for the duration of the loan. (In some instances,  you’ll deal with them dealer directly).

Pros
  • One-stop shop for purchasing and financing
  • Buyer incentives
  • Longer loan terms
  • Minimal down payment requirements
Cons
  • Hidden fees and add-ons
  • Middleman (i.e. financing department)

Credit Card

Some dealers will accept credit cards for auto loan purchases. Once you buy the vehicle, the contract is between you and the credit card company.

Pros
  • Zero percent interest (which is very beneficial if you pay off the balance before the promotional period expires)
  • Increased earning potential (with rewards and cashback)
  • Buyer protections
Cons
  • Shorter repayment period (before interest kicks in)
  • Exorbitant APR (if there’s no introductory offer or if you have poor credit)

(See: Which Are the Best Balance Transfer Credit Cards?)

***Credit card search tool: https://www.supermoney.com/reviews/personal-credit-cards

Steps to Financing a New Car

Follow these steps to take the hassle out of financing a new car:

Step 1: Get preapproved

The lender will want proof that you have the ability to make payments each month. If you’re an hourly or salaried employee, you most recent pay stubs should suffice. The lender may also request a recent bank statement to prove you have the funds for a down-payment.

But, you may have to provide a bit more documentation if you’re self-employed, including:

  • Bank statements from the past three months
  • Tax returns from the past two years
  • Business financials from the past three months

You’re free to start shopping once you have your preapproval letter in hand.

Step 2: Negotiate the price

Now that you’ve selected a car, it’s time to negotiate the price. This step is important as it determines the total amount you’ll finance. A few tips to negotiate the best deal:

  • Focus on the total cost, not the monthly payment.
  • Allow the salesman to make the first offer.
  • Remain firm and be prepared to walk away if they won’t budge,
  • If you’re trading in your current ride, negotiate the price first. (Also, be mindful of the cost implications of negative equity. This is the amount owed above what the car is worth).

Step 3: Select a loan product

The dealer will encourage you to speak with their finance department. If you take them up on their offer,  they may be able to beat your pre-approval terms. But if they can’t, you have two options:

  • Go with dealer financing to take advantage of the incentives and refinance in 30 days.
  • Select the lender with the best offer and forgo the incentives. If the dealer isn’t offering much, it won’t matter.

Step 4: Finalize the loan

If you decide to go with a direct lender, you’ll need to finalize the loan documents with them. But if you choose to finance through the dealership, you may have to fill in the paperwork on-site. In some cases, you’ll need to pay a down payment on the car.

Step 5: Run the Numbers

Read the entire loan agreement, and make sure you understand the terms before you sign. If you have any questions, now’s the time to seek clarity. Also, watch out for the add-ons.

Should You Consider a Lease?

The choice is yours, but leasing a car may be ideal if you:

  • Want a more expensive model for the same monthly payment
  • Change cars often
  • Have funds available for a down-payment

A few benefits and drawbacks to consider:

Pros
  • Cheaper monthly payments
  • Option to buy the car at the end of the lease term
  • Lower maintenance costs
Cons
  • Mileage restrictions
  • You don’t own the vehicle
  • Early termination fee

(Check out: Buy or Lease? What to Know Before You Decide on Your New Ride)

Securing Financing with Bad Credit

A less than perfect credit score isn’t the end of the world. In fact, there are several lenders that offer auto loans to credit challenged consumers. You may also qualify for a loan with a lower interest rate if you have a cosigner. (See: Best Auto Loans for Bad Credit)

Lenders Accepting Co-Signers

Lending PartnerMinimum FICOAPR Range 
6802.19% – 17.49% (with AutoPay)*Apply
6005.99% – 35.96%*Apply
6007.93% – 29.9%*

A Final Thought

With a little legwork, you can score a great deal when financing your new car. The tips in this guide can help you save hundreds or even thousands of dollars on your next car loan.
If you’re ready to buy, use SuperMoney’s auto loan search tool to compare lender rates and read reviews from other users.

Featured Auto Lenders

Lending PartnerMinimum APRLoan Amount 
2.19% APR (with AutoPay)*$5K to $100K*Apply
1.99% APR*$10K to $100K*Apply
5% APR*$7.5K to $45K*Apply
1.99% APR*Up to $15K
(Military only)*
Apply