Financing an auto
By Paige Kroger and Jennifer Isaac • Bankrate.com

A car is one of the most-expensive purchases you'll ever make. Experts say before you head out to the car lot, you should do your homework.

"It's best to be prepared and not to buy on emotion," says Mohamed Bouchama, executive director of the Toronto-based Car Help Canada, a nonprofit consumer organization with more than 5,000 members across the country.

When shopping for a car, he says you need to decide the following: how long you'll need the vehicle; will you buy new or used; and do you need a car, van or truck.

"For example, if you're a mother of three children, and you're often carpooling in an SUV, it won't work for long," he says. "People tend to buy on emotion. They sign and then say, 'Oh my God, I made a mistake.'

"My advice is to do your research and read as much as you can."

That leaves one important question: How will you finance your new vehicle?

Dealer vs. bank financing

"At least 70 per cent of cars and trucks are financed," says Bouchama. "Very few people have the cash on hand."

Car shoppers can get an automobile loan from a bank, credit union or other financial institution. You can also have these loans approved before you ever hit the showroom, which serves as a major plus in most deals.

Another option many people choose is financing offered at the dealership.

As a rule of thumb, dealer or manufacturer financing will cost more, but that isn't always the case. Sometimes, dealers will give you the best deal. The only way to be certain is to comparison shop.

"Consumers get addicted to the incentives that manufacturers offer, such as no money down," says Bouchama. But to get the best deal, consumers have to look beyond the flashy incentives, he says.

Interest rates on new cars are lower than on used vehicles. In general, new cars can be financed over longer terms than used ones, which often makes new cars cheaper than used ones.

Things you should know about dealer financing If you decide to go with dealer/manufacturer financing, the numbers are not set in stone. Interest rates can vary, as well as the size of the down payment and other details like the value of your trade-in or the length of the loan. You have to decide. Don't let one number dominate you. For example, a low down payment is not by itself a guarantee of a good deal. You need to consider all the numbers together to understand how good a 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 won't budge a penny on the price. Or to qualify for that rate, you'll have to pony up a larger down payment. It might be a better deal to pay higher financing on a lower-price car or you may go for a vehicle with a smaller down payment.

When dealers price vehicles, they build in a reserve for whatever incentive they're promoting in order to offset the negotiations. "For example, they may offer a $3,000 rebate on a $20,000 vehicle," says Bouchama. "At least half of that $3,000 is reserve."

Finding out what the dealer pays for the vehicle places the consumer in the best possible position. "If you know the dealer invoice, it'll help tremendously," he says. "A reasonable markup is 5 per cent to 6 per cent over the dealer invoice."

Signing the contract
When negotiating a contract, read and be sure you understand every word of every document you sign or initial. Make sure any changes to the basic contract are signed or initialed by both parties.

"It helps if you have a good relationship with your banker," says Bouchama. "It's very important to maintain that banking relationship. When you open an account, stay in contact with them.

And remember that you control one major variable: the down payment. The larger your down payment, the smaller you can make your monthly payments.

"Don't take the first deal that's offered," says Bouchama.

Rebates make some deals sound tailor-made for you. But rebates should be considered just another factor in your overall cost.

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

Paige Kroger is a freelance writer based in Mississippi; Jennifer Isaac is a freelance journalist based in Sundre, Alberta.