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Getting a Car Loan

Most dealerships provide financing and will try to entice you with attractive financing offers, but they don't always provide the best possible deal on financing. Your best bet is do a little comparison shopping before you even hit the lot. A bank or an online lender may actually give you the most bang for your buck. If the dealership from which you buy your car can match or better your bank's terms or offers a rebate as part of their financing package, you might consider using the dealership as your lender.
Step 1: Understand the Parts of a Car Loan If you can't afford to pay for an expensive item like a car in full, you can apply for a loan. A loan is exactly what it sounds like - a financial institution or individual lends you the money to pay for an item or service with the expectation that they will be paid back in full plus interest. Lenders naturally prefer to lend money to borrowers who have a history of handling their finances responsibly. Loans are made up of a few different components: Term: the term of the loan is its length. Will you be paying back the bank, dealer or your parents over 36 months, 48 months or longer? Remember that the longer it takes for you to pay back the loan, the more you will pay in interest. Interest Rate: the interest rate is the percentage of the loan you're charged for borrowing the money in the first place. Your interest rate will, in part, be determined by your credit history.

The APR (Annual Percentage Rate) is the best rate to use when comparing lenders. The APR is a way of expressing the "finance charge" you owe on a yearly basis, including both the interest and any fees you owe for the arrangement of the loan. Down Payment: your down payment is what you can afford to pay today. The larger the down payment you can make, the smaller the loan you have to take out. A large down payment may even secure you a more favorable interest rate. While there are many financing deals for cars that don't require a down payment, it is in your best interest to pay for as much of the car as you can up-front. BankRate.com recommends paying at least 20 percent of the car's purchase price as a down payment. Step 2: Learn How to Calculate a Sample Car Loan Here's an example of how the math on your auto loan is done: If you take out a $15,000 auto loan from your credit union with a 7.5 percent APR to be repaid over four years, you will owe $362.69 every month. Over a year, those payments would total $4,352.28. Over the life of the loan, you'll end up paying $17,409.12. That's $2,409.12 in interest over the life of the loan. While the terms of the loan will vary according to your lender, your down payment and your credit history (among other factors), it's important to go into any loan knowing that you will pay significantly more than the price of the car. You also need to plan the interest costs into your budget or the car might not wind up in your hands for very long. Step 3: Compare Bank and Credit Union Interest Rates Obtain car loan quotes from a variety of sources. You can look online, at local banks and at credit unions. Online finance websites allow you to compare auto loan interest rates across several banks in your city at once.
Once you've settled on a bank or credit union to finance your car purchase, figure out the loan's terms in complete detail, the interest rate and the life of the loan. Check the packages at a few different banks. After you discover the best offer, get pre-qualified for a loan.

 This process allows you to have an established loan rate and the size of loan that a bank, credit union or other financial institution is willing to offer you. At some institutions, you may be given a bank check that can be filled out with the car price you negotiate with a dealer. Having this check puts you in the driver's seat and allows you to negotiate better when you go to purchase your car and select the most competitive offer. Step 4: Evaluate the Dealership Financing Offer Having already secured financing from a lender other than your dealer puts you in a powerful position. It shows that you are a serious buyer and a financially literate customer, and it allows you to compare your dealer's best financing offer against your pre-qualified offer.

Before negotiating for a rate, be sure to establish the price of your desired vehicle first. Some dealerships try to negotiate based on monthly rate offers. This negotiating tactic can be confusing and can make it hard to really compare offers. Insist to negotiate on the actual "walk out the door" price of the vehicle. After settling on a price, discuss the dealership's financing offers. You may qualify for special incentive rates or extra discounts offered by the dealership that may make their financing offer more attractive than the pre-qualified offer you were given by a bank. If the interest rate is higher at the dealership but the rebate offer is highly attractive, it may be advantageous for you to take the dealer's offer and refinance your loan at a lower rate online. Just use caution with this tactic, as refinancing an auto loan often results in higher rates because the car will fall under the used car rates.