If you’re in the market for a new car, chances are you want to find a great deal. But if you’re also trying to keep your monthly payments low, it can be challenging to figure out how best to finance that purchase. To help, here’s what every car buyer should know about financing:

How To Finance A Car The Smart Way

Takeaways
Learn about the pros and cons of hybrid cars before making the switch
Compare hybrid and gasoline cars to choose the best option for you
Use our ultimate buyer’s guide to make an informed decision when buying a hybrid car
Explore smart financing options when purchasing a car
Understand how electric cars can save you money and benefit the environment

Table of Contents

Get Preapproved For Your Car Loan

The first step to financing your next car purchase is getting preapproved for your car loan. Getting preapproved shows the dealer you are serious about buying a car, and it allows you to negotiate from a position of strength.

You can get preapproved for a car loan from a dealer, bank, or credit union. Some dealers will provide approval after reviewing your credit report, while others may require that you provide additional documents such as proof of income and assets.

If you’re working with a dealership directly—as opposed to an online sales platform like CarMax or Autotrader—the process should take only minutes (or even seconds) once all necessary paperwork has been filled out and submitted.

There are three major benefits of being approved before visiting the dealership:

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Determine The Amount You Can Afford

Once you’ve become familiar with the various types of loans and car buying options, it’s time to start figuring out the right amount you can afford.

The first step is to determine the total cost of the vehicle you want to buy. This involves calculating the monthly payments on a new vehicle loan or lease, then adding in costs such as insurance, gas and maintenance.

You will also need to consider taxes because they are often added into your monthly payment when financing a car purchase through a bank or credit union. If this feels overwhelming, don’t worry—we’ll walk through it step by step in just a minute!

Shop Around For A Car Loan

Get quotes from several lenders. You can use online tools like Bankrate to search for the best financing options. You can also call up a few lenders and see what they offer you.

Don’t just look at interest rates—compare all the terms of the loan, such as repayment periods, fees, and penalties for late payments.

To get pre-approved for an auto loan, you’ll need to provide details about your income and assets (including any savings accounts). A credit score is also typically required when applying for financing; in some cases, you may need excellent credit to be approved for a car loan or at least have good enough credit that rates are reasonable given your financial situation

See If A Trade-In Makes Sense

When you’re ready to purchase your next car, it’s important to make sure that you get the best deal possible and a good way to do this is by trading in your current vehicle. You’ll be able to use its current value as leverage with the dealer, so they’ll have an incentive to give you a better price on your new vehicle.

For example: if the trade-in value of your old car is $10,000 and the sticker price on the new one is $25,000, then chances are good that they’ll knock off another few thousand dollars from the cost of buying that new vehicle in order for it not just be a wash for both parties involved (you and them).

It’s also worth paying attention when looking at what else might be available at different dealerships because sometimes there will be special offers only available for certain makes and models at certain locations—and this can give you more flexibility when deciding where exactly would work best for finding exactly what fits into all those budget gaps we talked about earlier!

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Get The Best Auto Financing Deal Possible

Before you break out the champagne and start celebrating, make sure that your car loan actually has a low interest rate. You can do this by doing some research and comparing the rates at different banks or lenders.

If you don’t want to go through the hassle of shopping around for a better deal, it may be worth considering refinancing your auto loan with another lender after only a few months (or even weeks).

You might also consider paying off your current auto loan early if it’s possible for you to do so. This will help lower the amount of interest accrued over time, which may save you money in the long run when compared against other financing options available today.

If possible, try not to extend more than two years on any new car loans; otherwise there’s just too much risk involved with holding onto such expensive assets for longer periods without being able make payments towards them every month while still getting something valuable in return (i.e., equity).

Another way professionals have found success finding affordable financing solutions is though securing their next vehicle purchase as collateral against receiving favorable financial terms from lenders like Capital One Auto Finance or American Express Credit Card Services Incorporated.”

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Pay Off Your Loan Early

When it comes to financing your car, the smartest thing you can do is pay off your loan early.

To help you understand how this works, let’s take a look at an example:

If you have a $10,000 car loan for 60 months at 4.5% interest with monthly payments of $206, over that time period you will have paid around $16,000 in interest alone (or about 15% of the original cost).

If instead of paying only the minimum amount each month ($206), which would take 60 months to pay off your loan (and cost well over $16K in interest), paying just an extra $100 per month would save quite a bit!

And if you can make a lump sum payment when one or more of these factors come into play: 1) You have extra cash 2) Your credit score has improved 3) The term of your auto loan ends soon 4) Car prices go down

Consider A Creditor’s Buy Rate To Keep Costs Down

Vehicle valuation is a complicated process, but it can be simplified if you know what to look for. The smart way to finance your next car purchase is to understand the difference between buy rate and trade-in value.

Buy Rate: The price a creditor will pay for your car when you trade it in during the financing process.

Trade-In Value: The estimated market value of your used or new vehicle when selling it privately. This number is often lower than the buy rate because you’re selling directly with an individual instead of through a third party or dealership (see “Private Party Sale Price” below).

Take Out Your Car Loan With A Credit Union Or Community Bank

Credit unions and community banks are non-profit financial institutions. They’re locally owned, which means they have a vested interest in your community and its residents.

They’re also more likely to work with you if you get into financial trouble—because of their non-profit status, credit unions often don’t require collateral for personal loans or car loans. As a result, they can offer lower rates than big banks.

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Don’t Forget About Interest When Shopping For A Car Loan

You’re probably familiar with the concept of interest, but it can be a little confusing. Interest is simply a percentage of the amount you borrow.

It’s calculated on a daily basis, so if you borrow $10,000 for one year at an APR of 5%, that means you will pay $1,500 in interest over the course of 12 months. The term “APR” stands for annual percentage rate and is the total cost of credit including interest and other charges (like fees or penalties).

Lender	Interest Rate (APR)
Wells Fargo	3.99% – 16.24%
Bank of America	2.69% – 4.99%
Capital One	3.39% – 11.25%
Chase Auto	2.14% – 7.94%
LightStream	2.49% – 6.79%

The table above shows the interest rates for car loans from various lenders. When shopping for a car loan, don’t forget to consider the interest rate, as it can greatly impact the total cost of the loan.

Keep in mind that interest rates may vary depending on your credit score and other factors. It’s important to compare options to find the best rate and terms for your financial situation.

Watch For Changes In Credit Score After Financing Your Car

Now that you have a car, keep an eye on your credit score. That’s because the higher your credit score is, the more likely it will be for you to borrow money in the future and get better rates on loans and credit cards.

If your score drops significantly after financing, you may not be able to get a loan as easily in the future—and even if you can still get one, it will cost more than it would have before.

Financing a car can be overwhelming, especially if you’re not sure where to start. Our guide on the smartest way to finance your next car purchase will help you understand your options and make the best decision for you.

Conclusion

Financing a new car is probably one of the biggest financial decisions you’ll make in your life. It’s important to take your time and do your research before you apply for your loan.

By taking these steps, you can make sure that when it comes time to sign on the dotted line, all bases are covered—and then some!

FAQs

What is the best way to finance a car purchase?

The best way to finance a car purchase depends on your financial situation and priorities. Common options include auto loans, leasing, and paying in cash.

How do I compare financing options for a car purchase?

To compare financing options, consider factors such as the interest rate, loan term, down payment, and total cost of borrowing. A car loan calculator can help you estimate how each option affects your expenses.

What is a good down payment for a car?

A good down payment for a car is around 20% of the car’s value, though this can vary depending on your financial situation. Making a larger down payment can help you save money on interest and reduce your monthly payments.

Should I buy new or used car?

The decision to buy a new or used car depends on your budget, priorities, and needs. While new cars typically come with a higher price tag, they offer the latest features and a longer lifespan. Used cars can be a more affordable option, but may come with higher maintenance costs.

What are some strategies for negotiating the price of a car?

To negotiate the price of a car, research the market value of the car and develop a budget before visiting a dealer. Don’t be afraid to negotiate on the price, and consider factors such as the total cost of ownership and financing options to get the best deal.