Financing a new car

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Shopping for a new car? With many new car prices running $30,000 or more, you'll probably need to use some kind of credit financing to help with the purchase. Banks, credit unions, and new car dealers can all arrange car financing. You may also be able to use your investment portfolio or a personal loan. Choosing the right financing can help save you money.

Shop around for financing

Just as you want to pay the lowest possible price for a car, you should also comparison shop for the best deal on a car loan. All lenders are not alike. You may be able to save hundreds of dollars by shopping around to find the best financing arrangement. Then see if a dealer can give you a better rate.

Borrow from a bank, credit union, or finance company

Banks and credit unions usually offer set, nonnegotiable rates, often less expensive than dealer financing. (They are also less likely to push the unnecessary expense of credit life insurance, which ensures that the loan will be paid off if you die prematurely.) Membership credit unions that offer auto loans typically offer lower rates than banks and finance companies. But finance companies — often the most expensive of all — may accept borrowers who are greater credit risks.

Borrow from a dealer

Convenience is the word here. Many automakers have their own lending affiliates and some dealers may act as agents for local banks, so you can choose a car and a loan in one session. The process is usually quicker than applying for a bank loan, and dealers are more likely than banks to qualify buyers with less-than-perfect credit ratings. They also usually help customers with special needs, like first-time buyers and recent college graduates. Best of all, car companies sometimes offer low-rate promotional financing on certain models. (But don't expect discount financing on popular models.) The downside? Dealer financing can be more expensive, particularly for poorly informed buyers. (Dealers can sometimes make as much on the financing as on the sale itself!)

Borrow against assets

Another option is to borrow at an attractive interest rate, with a flexible repayment plan, against a securities portfolio, passbook savings account, or a cash value life insurance policy. A risk here is that you could be forced to sell an asset at an inopportune time in order to meet a loan payment.
Selected online car-buying resources
Kelley Blue Book (www.kbb.com)
Browse prices for new and used cars using the same source many dealers use. Find out what your trade-in may be worth.
Get a history report for any used car you might be considering.
Autobytel (www.autobytel.com)
Browse online dealers in your area for new and used cars, apply for dealer credit, or even make a purchase.
Other important points to keep in mind:
  • Getting bank preapproval for a loan lets you negotiate with a dealer like a cash customer, which may give you extra leverage
  • If you do plan to finance with the dealer, settle on the price of the car before you talk about the terms of the loan
  • Some promotional financing rates apply only to shorter-term loans. The actual monthly payments can be steep, even if the interest rate is low.
  • Look carefully at life insurance and other financing add-ons

The quicker the payback, the more you save

If you take out a loan for a car, get the shortest payback time you can comfortably handle. While monthly payments can be reduced by stretching them out over more time, only a lower interest rate, a smaller loan, or a shorter term will lower the total expense. A $15,000 loan at 8% for five years, for example, will cost $3,240 in interest. You would save $672 if you paid an extra $62 a month for the same size loan over four years. The total interest cost would drop to $2,568.

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