How to Finance the Purchase of a Car
So, you want Leisure Suit Larry the car dealer to carry a loan for you? There certainly are some tempting offers out there. Zero down, zero payments for six months, no interest financing, and free gold bars in the trunk if you finance today are just some of the ads you may see trying to get you to make the dealer your banker. Why are they so interested in making a loan to you if they aren't making any interest on the deal? Well, remember, the car dealer's first priority is making sales. So, there may actually be attractive financing options from a car dealer if you know what to look for. First though, you should do your homework or you will get your pants taken down before you even know your belt is loose.
The first thing you need to find out is what other financing options are available. Go by your friendly local credit union. to see what kind of offers they have. You know how I feel about credit unions, they are great places to do local banking business, like car loans, and usually you can even talk to a real person, not too shabby. Have them run your credit and see what they can give you in the way of interest rate and duration of the loan. That way, you will have a reference point when dealing with the dealer. Let's face it, you aren't going to understand the 100 pages of fine print loan document written by Johnny Cochran that the dealer is going to shove under your nose. I'm not sure Johnny Cochran understands it, and he wrote the thing. The main things you want to look for are the interest rate, the time it is going to take to pay back the loan, and if there are any strange contract clauses such as low payments for one year and then they double, or if you are late one time, they can take your firstborn, things like that. You can then add the total of payments from that contract and see if they are significantly lower than from the credit union or bank total. If it is only a few hundred dollars difference, I would go with the credit union.
This brings up another important point. If the dealer gives you a super financing deal, they are reaching into one of your other pockets somewhere. Many times, if you get zero percent financing, you won't be eligible for rebates or incentives, which can often equal thousands of dollars. Also, a dealer will more thank likely charge a higher price for his heap if he knows he can dangle that "Great deal" of low financing in front of you. Run the numbers both ways, if you buy for cash (borrowed from the credit union of course) or if you use the dealer's financing and see which works best for you. Read my article on how to buy a care for ways to negotiate with the dealer. And, remember that cars don't last forever, or at least most Americans don't keep them forever.
Never get a loan for more than 48 months for a car. Cars depreciate, and with a 60 month loan, you will be upside down for the majority of the loan period, meaning you owe more than it is worth. What if you have to sell the car? You either have to pay someone to take it or it's bankruptcy city. If you can’t afford 48 month payments, buy something cheaper or wait until you can.
Don’t talk about financing until after the price of the car has been agreed on. Go in with the "I have all the cash in the world and I don't care if I buy a car from you or some other dealer" attitude. Then after the dealer has beat his brains out haggling with you, you can beg for financing. Dealers may offer 0% financing, but they will jack up the price of the car. So, get the price in writing first, and then think about how you will pay for it. Look at the total amount you will pay over the life of the loan, that is the true gauge of which loan is cheaper. And, never roll the cost of extras into your loan. You don't want to be paying for those floor mats or fuzzy dice for the next four years. You will be paying interest on them number one, and it will make it more likely to be upside-down on your loan as well. If you can't afford the extras, buy them later. There are plenty of parts stores that would be glad to sell you an incense burner for your car.
The main thing to remember is that the final price is what you should always be concerned about. Gimmicks of no-down, or low financing may sound great, but there are plenty of people I talk to every day that can attest to the fact that they are not. Do your homework, get multiple financing offers just like you would get offers on the car, and take your time before signing your life away. You may find that shiny new car is not so shiny after only a couple months, but the payments will linger for years.