How to Finance Your New Car

Planning to buy a new car? That’s great news, but how will you pay for it? If you don’t have enough savings to cover the purchase price, the right financing can bridge the gap and get you behind the wheel quickly. Before you shop, explore the ins and outs of auto loans and how to find the best deal.

Dealer vs. Direct Lending

When it comes to auto loans, you have two basic choices: dealer financing and direct lending. Dealers often offer manufacturer-sponsored incentives — reduced interest rates and rebates — to get you into the showroom. Once you’re there, the goal is to close a deal before you walk back out. The dealer will work with various lenders, often after normal business hours, to come up with financing options. But there can be a price for this convenience: The rates you get through the dealer tend to be higher than those of direct lenders.

Direct lending involves such financial institutions as credit unions, banks and finance companies, with no intermediary to hike up your costs. Lenders that are nonprofit, such as Heritage Valley Federal Credit Union, often offer more competitive rates on auto loans.

Consider getting pre-approved by a lender before you start shopping. That way you’ll know what your interest rate will be and what kind of car you can afford — and it will strengthen your bargaining position with a dealer.

0% financing: Too good to be true?

Dealer ads touting 0% financing may sound like an amazing opportunity. Before rushing in, however, be aware that to qualify for an interest-free financing arrangement, you generally need to have stellar credit and be willing to fork over a hefty down payment. Most customers get turned down for this special financing and are offered more expensive loans when they’re ready to purchase.

What about rebates?

Often, dealers offer sizable cash rebates on certain car makes or models and then tell buyers they can choose their incentive: either the rebate or reduced-interest financing. So, which one makes more sense? It depends on which is larger — the amount of the rebate or the savings you’d get from the lower interest rate over the life of the loan. The wrong guess could cost you thousands, so it pays to do the math every time. Free online calculators are available to crunch the numbers and let you see which one results in the lowest overall cost. If the rate that a direct lender will offer you is competitive with the dealer’s best rate, the decision becomes easy: Take the rebate, and finance through the direct lender.

When you’re ready to buy, aim to keep your total monthly cost of car ownership – including loan payment, insurance and gas – to no more than 20% of your take-home pay after you’ve paid your other bills. Familiarizing yourself with your options, doing your homework and not overextending yourself financially can result in significant savings and let you affordably take your new car on all kinds of exciting adventures.

Roberta Pescow, NerdWallet