Smart Strategies and Tips for Financing Your Car

Save serious money on auto financing by leveraging competing loan offers at the dealership, making at least a 20% down payment, and keeping the loan term as short as you can realistically manage. One of the biggest mistakes people make when buying a new car is forgetting to include the cost of auto financing in the total price. For instance, negotiating a lower sticker price is great, but if you end up with unfavorable loan terms, you might pay much more in interest over time. This comprehensive guide provides you with time-tested steps to save money and make informed decisions when financing your next car, ensuring you don’t fall into common pitfalls and end up paying more than necessary.

Check Your Credit Score Before You Go to the Dealership

The first step to securing an ideal car loan is to check your credit report and score. There are plenty of sites that let you do this online for free, such as Credit Karma and Credit Sesame. Dealerships often advertise very good interest rates on new cars, but these rates are typically available only to car buyers with the best credit—those with a score of 750 or better. If your credit score is below 750, you may not qualify for the best promotions, and rates can rise quickly for scores below 700. For borrowers with a below-average credit score (under 650), car loan rates can exceed 10%.

Get Financing Quotes if Your Credit Score Isn’t Perfect

If you have an excellent credit score (750+), you can usually get the best financing rates directly from the dealership. The dealer will often act as a broker, presenting the best options across multiple lenders for those with great credit. However, if your credit history is less than stellar, research rate options online before visiting the dealership. Online lenders and your usual credit union or bank are likely to offer more competitive rates than the in-house rates from the dealer. Thoroughly researching rate options can save you a significant amount of money.

Keep the Loan Term as Short as You Can Afford

Regardless of your credit score, dealers will try to sell you on low monthly payments, zero down, and long car loan terms of four, five, or even six years. This is the opposite of what you want. Lower monthly payments may seem appealing, but they often mean higher interest costs in the long run. The longer you take to repay a car loan, the more interest you’ll pay. Many times, banks will charge higher interest rates for longer loans, further increasing your cost of credit. Stretching out an auto loan to get more comfortable monthly payments can lead to paying a lot more in interest and being upside down on your car for much of the loan’s term.

Make a 20% Down Payment

In addition to keeping the loan term short, minimize the loan principal by making at least a 20% down payment on your new car. The principal is the total amount you borrow and must pay interest on. When a dealer offers a loan with zero down payment, it maximizes the principal so the lender can charge more interest. Making a significant down payment reduces the principal and the total interest you’ll pay over the life of the loan. If you can’t afford to put 20% down, you may not be able to afford the monthly payments plus interest over the course of the loan.

Pay for Sales Tax, Fees, and Extras with Cash

Dealers may try to roll miscellaneous expenses like dealer fees, taxes, extended warranties, and optional extras into your financing. For example, they might offer an infotainment system upgrade for a small monthly fee, which can add up significantly in interest over time. Asking for an itemized invoice and paying cash for these extras ensures transparency and prevents you from paying unnecessary interest. Always ask for the “out-the-door price” to get the bottom-line cost of the vehicle before discussing finance terms.

Avoid Gap Insurance

Gap insurance covers the difference between what an insurance company thinks your car is worth and what you owe on your car loan if the car is totaled. However, if you structure your auto loan with a 20% down payment and a short, three-year term, you shouldn’t need gap insurance. Proper loan terms should prevent a scenario where you owe more than the car’s value. If a dealer pushes gap insurance, it might indicate that your loan terms need re-evaluating.

Buy a Car You Can Truly Afford

Your car is a depreciating asset, not an investment. Most cars lose half their value in five years, so it’s important to pay off your car as soon as possible. Dealers will try to sell you on low down payments, low monthly payments, and long loan terms to make more money off interest. An auto loan should help you get a car you can afford, not one beyond your means. Use a car affordability calculator to determine what you can realistically afford for an auto loan payment, and don’t let dealership financing persuade you otherwise.