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Where to get the money

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

You can get an auto loan from a bank, credit union or other financial institution. 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 through the dealer or from the auto manufacturer. It’s possible that dealer/manufacturer financing will cost you more, but it isn’t written in stone. There will be occasions when a dealer will actually give you the best deal. Unfortunately, those occasions are not predictable (despite endless “must sell,” “lowest rates possible” 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 could be tax deductible. But be sure such a loan won’t leave you in any danger of losing your home.

Know your 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 locked in before you buy, especially if you go with dealer/manufacturer financing. The interest rate you pay can vary, and so can the down payment and other details, such as 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.

Profit in financing

Dealers will often paint a low price on the windshield, and 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! Read — and be sure you understand — every word of every document you sign or initial. No exceptions.

Length of loan

Also keep in mind that time is money when it comes to financing — meaning that the longer your loan term, the more it will cost you.

Some lenders are offering loans that run to 72 and even 84 months. Run from those like the plague because the interest rate will be substantially higher than even a five-year — 60 month — loan. Also, the longer the loan term, the longer it will take you to reach a point where you’re no longer “upside down” on your loan — meaning you owe more than the car is worth. In a later chapter, we’ll discuss how much of a down payment you should make to shorten the time you’re upside down on a loan.

Dealer come-on? Go!

Lastly, don’t fall for the currently hot dealer come-on that says, “We’ll pay off your car no matter how much you owe!” What this always entails is rolling over the balance you owe on your trade into the new car loan. So that new $25,000 sedan you just bought could carry a loan balance of $28,000 to cover the $3,000 you still owed on your old car.

Falling for that financing gimmick will make you a long-term loser.