Finance_New_Car

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 know how to finance a new car.

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 tour 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.

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 a new car 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.

WEIGH THE PROS AND CONS

Compare the pros and cons to make a better decision.

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 its 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 the dealer directly).

WEIGH THE PROS AND CONS

Compare the pros and cons to make a better decision.

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 Cards

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.

WEIGH THE PROS AND CONS

Compare the pros and cons to make a better decision.

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?)

If you need to compare credit card options, check out SuperMoney’s

Compare the pros and cons to make a better decision.

(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)

The following cards allow you to apply with a cosigner.

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.