Need a new car but feeling a bit overwhelmed at all the facts and figures running through your head? Never fear: We’ve simplified the car financing landscape and come up with nine helpful tips for navigating the notoriously tricky car buying minefield. Whether you’re looking to lease or buy, and whether your credit is excellent or weak, we want you to feel confident about making the best decision on your new ride, financially and otherwise.
Don’t Jump Into a Long-Term Loan Strictly for the Lower Monthly Payment
Financing a car over a longer term often results in higher interest rates, which means you might end up paying more for a car in the long run, even if your monthly payment is lower. For example, compare a car that costs $250 per month for 4 years to another that costs $220 per month for 6 years. While the second choice may seem tempting because of the lower payment, the first car saves shoppers nearly $4,000, and that’s without taking interest into account. In other words, sometimes a higher payment is better.
Check out our article Buying a Car: What Term Should Your Loan Be?
Shop Around for Financing, and Don’t Worry About the Hit on Your Credit Score
While many shoppers are afraid of the impact that shopping for a loan will have on their credit scores, the effect is minimal in reality. Several banks can run your credit with very little change to your score, and sometimes there won’t be any change at all. In fact, we think the average loan shopper might see a 2- to 5-point drop in their credit score when searching for a loan — a small figure, especially if it’s the difference between receiving a high interest rate from one bank and a low rate from another.
Check out our article Buying a Car: Does It Hurt Your Credit to Shop Around for Financing?
If You Have Excellent Credit, Look for 0 Percent Interest Deals — They Really Do Exist
Since you’re not giving the bank any incentive to lend you money, you might wonder how it’s possible to get a 0 percent interest rate. Usually, it isn’t the bank doing the lending, it’s the automaker. The way an automaker makes money with a 0 percent deal is simple: It still earns the same amount it would earn on any car deal by selling you the car; the 0 percent interest is just an incentive to convince you to buy the car. So the money isn’t made on car financing — it’s made on the car itself. If you feel enticed with a 0 percent interest rate, be sure to confirm that the rate is available once you arrive at the dealership.
Check out our article Buying a Car: What’s the Catch With 0 Percent Loans?
Finance Instead of Paying With Cash When the Interest Rate Is Right
The primary situation when you should finance rather than pay with cash comes when interest rates are especially low. In virtually every case in which you’re offered 0 percent interest, for example, you should take it. In these cases, the bank or car company isn’t charging you for the privilege of spreading out your payments rather than paying entirely up front. If you’re given a rate as low as 1, 2, 3 or even 4 percent, you should also think about financing your vehicle rather than paying with cash. It allows you to keep around extra cash that would otherwise be tied up in your car, and you could invest the money and earn a high enough return to cancel out your interest payments instead.
Check out our article Financing a Car: When Is Financing Better Than Paying With Cash?
If You Have Weak Credit, Produce a Hefty Down Payment
The more "skin" you have in the deal, the more likely a lender will be to take a chance on you while charging a lower interest rate. It’s all about risk. Lenders believe the more equity (down payment) you have in a car, the less likely you’ll be to default on the loan. Whether it’s a home mortgage or a car loan, lenders view 20 percent as a reasonable down payment. You may get away with less. If your credit is really weak, however, putting down more will convince a lender you’re serious about your finances and will further improve your chances.
Check out our article 5 Tips for Financing a Car With Weak Credit
If You’ve Ever Filed for Bankruptcy, You Still Have Options
One place where drivers might find slightly relaxed lending practices is a credit union. While large national banks might not be willing to finance people whose credit score is below a certain level, a local credit union may have more flexibility. Another option is to visit a few dealerships. Although many dealers go through traditional banks or lenders, some use companies that can help customers with dinged-up credit or a recent bankruptcy. As a result, a dealer may be more helpful in finding you financing than a bank or a credit union. Another way to avoid traditional banks is to visit a Buy Here Pay Here (BHPH) used-car dealership. They usually don’t go through banks or lenders for loans, which means drivers purchase their car and negotiate payments directly with the dealer.
Check out our article Financing a Car: How Can You Buy a Car After Bankruptcy?
If You’re Planning to Lease Because You Want a New Car, Try Buying CPO
If you’re considering leasing to drive more car than you can afford to finance, step back and think about buying a certified pre-owned (CPO) vehicle instead. It’s less car with lower payments and some equity on the back end. These used cars are certified by the carmakers, usually with some type of carmaker-backed warranty. You can find a CPO 2014 Audi A4 Premium Plus for about $28,000. With a down payment of $2,800, you’re left with $25,200 to finance. According to Bankrate, the current interest rate on a 60-month used-car loan is roughly 3 percent. Your monthly payment would be about $453. On the flip side, a new 2016 Audi A6 Premium Plus 3.0 retails for $58,325 with a destination charge. After $5,740 down, Audi will lease the car to you for $605 per month for 36 months. The CPO A4 is less car, and it’s a used car, but at the end of 5 years, you’d own it, and it’d still be worth about $7,000. This is equity you can use as a down payment on your next car.
Check out our article When Buying a Used Car Makes More Sense Than Leasing a New One
If You Still Want to Lease, Know Your Money Factor
The term "money factor" refers to the interest rate on a car lease, but it isn’t expressed in the same way. The money factor on a lease is almost always written using an extremely small decimal, such as 0.00167 — and that’s when it’s written at all. Most drivers with leased cars don’t really know what their money factor is, and they don’t think to ask about it when signing the lease papers, but it can be very important to the monthly payment. Here’s why: While most shoppers think leasing simply means paying the depreciation of a vehicle, there’s also a finance charge included in every lease. That finance charge is the money factor. This is money the dealer or automaker charges you for the privilege of leasing. Ask for your money factor, and multiply it by 2,400. If the rate you see is higher than you expect, negotiate a lower money factor or move on to a better deal.
Check out our article Leasing a Car: What Is the Money Factor?
Check Car Insurance Rates Before Buying a Vehicle
Although car insurance rates may seem straightforward, you don’t want to call your insurance company after you purchase a car and discover it’s more expensive than you thought. As a result, we strongly suggest getting an insurance quote before buying a vehicle, especially if you’re considering a newer vehicle than you’re accustomed to, financing a vehicle or buying a vehicle for a younger driver.
Check out our article Here’s Why You Should Check Car Insurance Rates Before Buying a Vehicle