Financing an auto
By Paige Kroger • Bankrate.com

Seven out of 10 new cars and trucks are financed, and you can also finance a used car. But to do it right you must be prepared before -- and after -- you reach the car lot!

You can, of course, pay cash.

You can get an auto loan from a bank, credit union or other financial institutions. You can have these loans approved before you ever hit the showroom (a major plus in most deals). These sources of financing will usually offer the lowest rates you'll find, and credit unions are generally lower than banks.

You can also get financing from the dealer or auto manufacturer.

A general rule of thumb says that dealer or manufacturer financing will cost you more, but it isn't written in stone. There will be occasions where a dealer will actually give you the best deal. Unfortunately, those occasions are not predictable (despite endless "must sell" and "no money down" advertising by dealers) and the only way to be sure is by comparison shopping.

One other choice is a home equity loan. You'll get a good interest rate and the payments will be tax deductible. But be sure such a loan won't leave you in any danger of losing your house -- after all, it's just a car. If financing is a stretch, your family may loan you money or co-sign for a loan. If they do, make sure ALL parties are fully aware of every detail of the loan and the possibilities should circumstances change or things go wrong.

Keep leasing in mind even if you think you don't want to do it. It may be an option you like more as you go along.

It's all in the numbers
Interest rates on new cars are lower than on used vehicles. And, in general, new cars can be financed over longer terms than used ones. This equation can make a new car cheaper than a used one in many cases.

Not all the numbers in your deal will be set in stone before you buy, especially if you go with dealer or manufacturer financing. The interest rate you pay can vary, and so can the down payment and other details like the value of your trade in or the length of the loan you take. You have to decide. Don't let one number dominate you. For example, a really low down payment is not by itself a guarantee of a good deal. You need to consider all the numbers together to know what sort of deal you're getting.

Dealers will often paint a low price on the windshield, then make their money back when they finance the car. Sometimes, dealers offer very low interest rates for specific cars or models, but then they won't come down a penny on the price. Or to qualify for that rate you'll have to pony up a large down payment. You might find it a better deal to pay higher financing on a low-price car or you may go for a vehicle with a low down payment.

Bottom line -- know your numbers. Be sure, every step of the way, that you know just how much you are paying, when, how and what for! No exceptions!

In simple terms, you will pay a lower monthly amount the longer the term of the loan -- but in the end you will pay out more in total for the vehicle this way. The longer the loan, the longer it takes you to build up equity -- that is, for the car to be worth more than you owe on it. So with a long loan it will usually be some time before you can re-sell the vehicle and clear the loan.

Know your contract!
Read -- and be sure you understand -- every word of every document you sign or initial. No exceptions.

Sign nothing unless you understand what it is, make sure every "i" is dotted and every "t" is crossed and there are no blanks left. Make sure any changes to the basic contracts are signed or initialed by both parties.

If you get embarrassed by a feeling of asking too much, imagine how much fun it will be to tell a dealer later that he has got it wrong and owes you something. He will haul out that contract you caved on.

When you sign the contract make sure the dealership has an authorized representative sign -- you don't want to find out later that the nice salesperson was not empowered to sign on behalf of the dealership.

And always make sure you have copies of everything you signed.

Be wary of advertising
Be wary of advertising that promises special offers, e.g. for first-time buyers, people with less than perfect credit or senior citizens. In offering loans to people who don't have stellar credit, lenders often require a large down payment and a high interest rate. If you need to sell the car in the short-term, or if you write it off in an accident, you may owe more than the car is worth. And with any special offer, consider the reputation of the dealer making it.

Truth in advertising laws can also help you know just what a dealership is offering and whether that outfit is following the rules.

During the debate over price and total cost of the car, remember that you control one major variable -- the down payment. Make it bigger and you can start bringing down the monthly payment amount.

Rebates make some deals sound just made for you. But rebates should be considered just another variable factor in your overall cost. Use your calculator to work out just how much a rebate will save you. Also keep in mind that rebates can artificially jack up the popularity of a car, then two or three years down the road when it comes to reselling the car, that artificial popularity has gone and you're trying to get good money for a vehicle very few people wants.

Golden rule of auto financing: Go prepared. Uncertainty is your enemy, and salespeople are experienced at recognizing and using it.

-- Posted: Dec. 9, 2003