Financing Options

The wisest and thriftiest course is to pay cash for your cars.  If this is not an option, I highly recommend you obtain financing before you settle on a particular vehicle.

Web-based lenders provide a painless application process for internet-savvy loan shoppers with good credit. For those borrowers with a poor credit rating, you'll find sharp increases in interest rates as well as down payments.  Click Here to apply for a loan from one of our finance partners. Negotiate for car and financing separately.  Remember that manufacturer rebates go to you, not to the dealer.  Credit insurance is probably an unnecessary option.

0% Financing - Desperate to unload slow-moving inventory, many manufacturers are offering the best deals in history, providing your have excellent credit and finance through the automaker's captive finance company.  If you qualify, take advantage of these incredible financing deals, they might vanish at any time. General Motors latest incentives include 0% financing for up to 60 months on remaining 2002 models. For 2003's, GM is offering 0% loans for up to 36 months plus attractive rates on longer term borrowing. Chrysler is mirroring GM's 0% for 36 months and low rates for longer term loans. Ford is also offering no-interest (0%) financing or cash rebates of up to $3500 on all 2003 vehicles as well. No-interest financing is also available on select Toyota products while Volkswagen has a special .9% financing offer on certain slow-moving models.

Unfortunately less than 50% of new car shoppers qualify for no-interest financing, as an excellent credit rating is required. And many 0% purchasers forget that the price is still negotiable on any vehicle, regardless of the financing or the rebate. Many who qualify for 0% financing should also consider taking advantage of the sometime lucrative manufacturer's rebate (up to $3500 in some cases). If your looking at inexpensive vehicles (under $15,000) or have a valuable trade-in or down payment (over $5000) rebates can offer a better deal. Longer terms at higher rates might better fit in to your monthly budget.

For example, at 6%, interest on a $16,000, 48 month loan will come to $2,036. If the rebate is $2500, take it, you'll realize an additional savings of almost $464. Another caveat are short term (24 to 36 months) 0% financing offers. At 0%, the payments on $20,000 will be $555 a month for 36 months; too much for households on a tight budget. You might consider a $20,000 4-year loan at 1.9% that lowers the monthly payment to $433 ($785 in interest). The same $20,000 at 3.9% for 5 years brings your payment down to $367, although the interest would be substantially higher at $2,045. Use the free rate calculators found on most web-based finance sites to figure out your specific financial requirements.

Renting Money - As I mentioned in How Much Can I Afford?, I recommend against borrowing money to buy a car (0% financing being an exception).  If something costs more than we can afford, we shouldn't buy it.  I drive cars that cost LESS than I can afford.  For example, my dream car is a 2008 Mercedes-Benz CLS550.  I know I could buy one, providing I financed the purchase through Mercedes-Benz credit.  But I continue to drive my 2003 Volkswagen Passat instead.  Why? I own the vehicle outright, it's one of the safest and most economical mid-sized cars on the road, and it still has a good 100,000 miles left in it (current mileage is 95,000).  I don't need a new car even though I would like one.  Too often today our wants and needs get confused.  Our friends at the lending institutions are all too willing to separate us from what little money we do have.  Other sites give you pages of tips and tricks on how to build up your credit, so that you can spend more than you can afford.  They fail to mention the costs associated with borrowing (that is, renting) money.  The amount of money you will pay a lending institution for that privilege is outrageous!   This site lists no such tips, because I refuse to help people put themselves in debt in order to buy the worst investment that they'll ever make.

Lenders are required to show the calculation for Annual Percentage Rate (APR) in clearly readable type on the contract.  The federal Truth-In-Lending Law dictates that lenders disclose the APR and total dollar amount of the interest you're paying them to borrow the money for your auto loan.  If you borrow $22,000 for a new car, your cost to rent the money will be between $2,000 and $5,000, depending on the term (length) of the loan and its interest rate.  Don't forget, the rent is in addition to the price of the car, so your $22,000 car will actually cost you between $24,000 and $27,000.   Dealers, not wanting to alarm you, will slide right by the real cost of financing, concentrating instead on your monthly payment: "Would you buy this car today if I could get it for you at $199 per month?"  The amount of interest you pay is spread out over the life of the loan and varies from month to month.  Luckily for the dealer, most customers don't want to hear about amortization schedules and settle on the dealer's monthly payment with no further questions.   Remember: the interest you pay is a 100% loss, i.e. it isn't tax-deductible..

Negotiate For the Car and Financing Separately - You should negotiate the price of your motor vehicle separately from any financing or leasing arrangements.  Loans and leases are different products from the car.  Decide whether you will lease or buy and find your financing long before you enter into negotiations with a dealer or a private party.  And  don't tell the salesperson that you intend to get financing elsewhere until the vehicle's price is already negotiated.  

Why Should You Get Your Financing First? - Securing financing before you sit down with a dealer puts you in a better negotiating position.  Pre-approval turns you into a cash buyer as far as the dealer is concerned. Without pre-approved financing, you'll have to deal with the dealer's finance department, a task I advise you to avoid.  If you choose to ignore my advice, be prepared to pay a higher rate, or pay hidden "points" when you finance through the dealer. When you furnish credit information to a car salesman, he then shops your deal (total price, down payment, desired length of loan) to various lenders that the dealership is associated with. If all goes well the lenders will make an offer to the dealership based on your credit rating and specifics of your "deal". The interest rate at which a lender is willing to make a loan is called the "buy rate." Included in the lenders offer will a small ($50 to %100) fee giving them the additional business, which is usually split by the dealership and the salesman.

In rare cases a good and honest dealer will relay the terms of the lenders offer back to you without adding any additional interest or fees, in the hope that you'll accept the deal right then and there. However that rarely happens, many greedy dealerships and salesmen then add a percentage point to the lenders offered "buy rate" and pocket it (a potential additional profit of $200 on a $20,000 loan). They won't tell you about as they consider it a reasonable fee for the inconvenience of getting you financed, even though the lender has already given them a fee for exactly the same service. The same holds true for manufacturer's financing. The reality is that they get paid by the bank (or manufacturer) and they get paid by you, realizing anywhere from $200 to $400 additional profit on a typical new car. The same holds true on used-car loans as well. Don't expect the salesman or dealership to acknowledge that any hanky panky has taken place, just take my advice and avoid dealer financing altogether, get your financing before you go to the dealer!

Should I Use A Home Equity Loan Instead Of A Traditional Auto Loan? -  Home equity loans and lines of credit can be a great alternative to auto loans. The rates are low and the interest paid may be tax deductible, resulting in the lowest after-tax cost. Keep in mind that they should only be used by people with a steady stream of income who can use the interest deduction. Consult your accountant or tax advisor to see if you can benefit from this kind of financing.

How Do You Shop For Financing? - By now you have a good idea of what you want and how much it's likely to cost.  With this information you can seek a loan at your bank, credit union, or online.  Don't forget to look for special manufacturers' financing and rebates (see Special Manufacturer's Financing).  Be aware that your credit status affects the rates you'll qualify for.  Whatever your credit rating, I recommend that you obtain an online quote from one of our finance partners before you shop around. Most online financiers guarantee you the lowest available interest rate, and will send you a bank-approved blank check that can be used at an online buying service or at your local dealer. Online lenders usually don't care what kind of vehicle you are buying and don't charge higher rates for sports cars or luxury automobiles (in contrast to traditional financing sources). As I've stated previously, the major drawback to dealer financing is that each dealer receives a "cash incentive," a kind of kickback, from a lender each time a loan they submit is approved.  And the loans they write help pay for the kickbacks they receive, so don't expect an attractive rate or beneficial terms.  The higher the APR they charge, the more money they make.  If you need to finance, use a payment calculator to see how changes in rate, purchase price, term, and down payment can reduce your loan payments. Pre-approved credit offers you the option of taking the rate the dealer offers, if it's better, or using the one you already have.  You can tell the lender the rate is too high and what you can get it for elsewhere.  If they need business on that day, they may lower the rate to get yours. 

How's Your Credit? - If you have no idea what your credit report shows, now is the time to order a 3-bureau (TRW, Equifax, & TransUnion) credit report from CreditReporting.com. See what's in your report before you speak to any car dealer or financial institution.  Many people don't know what's on their credit report, but don't be surprised if your car dealer has seen it.  Lenders determine the credit of a prospective borrower using data obtained from TRW, Trans Union, and Equifax.  Consumers receive an  A, B, or C grading based on their income, credit history, and previous debt experiences.  A-rated borrowers, the VIPs of the financial world, get the lowest rates.   B- and C-rated borrowers are not considered bad problems anymore and can usually buy a vehicle with a substantial down-payment or co-signer.  Sub-prime financing, as this is called,  is the fastest-growing, highest-grossing area of the automotive business today, and many dealers cater to this profitable sector.  Be careful, as sub-prime dealers are experts at taking people to the cleaners.  Their rates are usually much higher (20% or more), and they'll try to throw in expensive warranties and insurance policies as well.  

Restoring Your Credit - There's only one way to restore tainted credit: pay back what you owe.  If you have several credit card balances, pay them down before you buy a new car.  High balances hurt your chances of qualifying. 

Applying for a Loan - The most efficient way to shop for a new loan is on the Internet.  First do a general search web to get a general idea of rates in your area.  Major lenders like G.E. Capital, Chase Manhattan, Daimler-Chrysler Financial, Ford Motor Credit, and GMAC all have online credit applications, and you should research the offerings of all applicable lenders before filling out any applications.  Once you have an general idea of the going rate in your area, complete this simple form to get a free no-obligation  quote from one of our finance partners. Web-based lenders provide more options for internet-savvy loan shoppers.  If you have excellent credit they not only guarantee you the lowest available interest rate, they'll even send you a bank-approved blank check that can be used at any online buying service or at your local dealer.  Contact prospective lenders (banks & credit unions) in your area by fax or phone.  They can send you all the forms and contracts you'll need in advance so you can read them at your leisure.  Don't sign any credit-check releases until you're satisfied with all of the information a lender is presenting.  It's important to limit the number of applications, as each credit check appears on your credit history.  Multiple credit checks may be interpreted as an inability to acquire credit, so limit their number.  Don't give anyone the opportunity to misinterpret your credit record. 

How Are Loans Calculated?-  A loan consists of a number of different components, including the loan rate, duration, and down payment.  The loan rate is the annual percentage rate.  The term is the length of time the loan spans, in months.  The down payment, ranging from 0% to 25% of the purchase price, is the money you offer, or that may be required by the lender, to reduce the amount of the loan.  The first loan payment is normally due 30 days after signing the contract. 

New Vs. Used Auto Loans - With more people considering used-car purchases and younger off-lease vehicles available, many banks have introduced 60-month late-model used vehicle programs.  Used cars depreciate much more slowly than new models and make better short-term collateral for lenders.  Consequently, interest rates for used vehicle loans differ from new by little more than one percent for qualified buyers.  Some institutions, however, still consider used-car buyers more of a risk and automatically charge a much higher rate.  Many lenders decrease the loan's term (length) and increase the interest rate as a customer's credit rating declines. 

Who Owns the Vehicle? - When you buy a car with borrowed funds, the lender places a lien against its title.  If you default, the lender (lien holder) may repossess the vehicle and sell it to offset the balance owed under the installment agreement.  While you are free to sell the vehicle at any time, the lender must be paid back before title can be transferred to the new owner.  Financing agreements usually require that you keep liability, comprehensive, and collision coverage on the vehicle until the loan is paid off.  If you neglect your insurance premiums, your insurance company automatically notifies the lien holder of your lapse in coverage.  In that case, the lender takes out a very expensive policy for you and adds it on to your monthly payment.  If you refuse to pay their policy premiums (typically 2 to 3 times what you were paying for insurance), you automatically violate the terms of your loan and they will repossess your wheels.  Car dealers cannot allow a vehicle to be delivered without first obtaining an insurance card with the vehicle's VIN# on it.  Some contracts prohibit journeys to Canada or Mexico, so get the lender to add a rider to your contract if you plan on traveling outside of the country in your vehicle.

What if the Car I Bought is a Lemon? - You are responsible for paying back your loan, no matter what happens to the vehicle.  The manufacturer or dealer/seller is legally responsible for any problems you encounter, not the lender.  If the transmission fails on the way home from the dealer, you still have to pay back your loan.

How Much in Down Payment? - You must put at least 20% down on a car, or you'll end up owing more than it's worth.  But how much more than 20% is the right amount?  You may find you have better uses for cash than applying it to the down payment.  If you don't require small car payments, it may be better to have larger monthly installments and use the cash-on-hand for investing or paying off high-interest debt.  Using a Loan Calculator site from Internet Resources, consider how different payments affect your monthly budget.  Experiment with the size of monthly payments for different lengths of loans at different interest rates.  Measure whether a higher down payment is better by determining the difference between the return on investment if the cash is invested and the decrease in car payments over the term of the loan. (Loan payment with smaller down x total months, minus loan payment with larger down x total months, compared with interest earned on the down.)  If earnings on the interest are larger than the savings on the payments, use the cash for something other than the car. 

Special Manufacturer's Financing and Rebates - Before you go shopping, check the Rebates, Incentives & Special Financing section of Internet Resources, to find out if any of the models you're looking at gets a rebate.  Some manufacturers offer you a choice of taking special low financing (sometimes as low as 0.0%) instead of a rebate if you qualify.  Rebates and special financing are factory-sponsored discounts intended to give new-car buyers a deal on slow-moving inventory.  However, some unscrupulous dealers see them as icing on the cake, and may try to tell you there isn't one when in fact there is.  If a dealer successfully shields the existence of a rebate from a qualifying customer, the dealer gets to keep it.  Speak up about any rebates or special financing you know about.  You'll rarely see a rebate on a hot-selling car, because they don't have to offer one; the car is selling itself.  When the time comes to negotiate the price, do so BEFORE you discuss the financing or subtract your rebate; also before you mention you have a trade-in.  See more at Final Dealer Negotiations.

Which Is Better: A Rebate or Special Dealer Financing? We STRONGLY suggest getting your financing first, then applying the Manufacturer's Rebate to your purchase price. Combining a manufacturer rebate with pre-approved financing is a great way to maximize your savings. Remember when the time comes to negotiate the price, do so BEFORE you discuss the financing or subtract your rebate; also before you mention you have a trade-in.