best way to buy a car is with cash. It can stop you from overspending. It also
avoids paying interest on a loan for years. Of course, paying cash isn’t always
you just have to have a new ride, especially if you have to drive to get to
work. But when you find yourself in this situation, what you don’t want to do
is simply pick a car from the dealer and accept whatever financing terms they
use these steps to make sure you’re financing your car in the smartest way
How to Finance a Car
1. Get your
credit score in order first
shopping for a vehicle, check your credit score. Chances are you can check
it for free. However, some free options are actually based on estimates. So
they may not actually show the score lenders will see. Because of this, you
might want to spring for your official FICO score from at
least one, if not two or all three, credit bureaus.
though, there are many different FICO and VantageScore models. Your lender may
not pull the exact model you purchase. So your score could
still vary, though usually not by more than a few points.)
your credit score in the low-to-average range? If possible, take some time to
bring your score up before you apply for auto financing. You’d be amazed at how
much interest you can save just by boosting your credit score.
sure where to start? Check out out these articles:
Simple Ways to Improve Your Credit Score Today
How to Improve Your FICO Score with Credit Expert Tom Quinn
to Build Credit When You Are Just Starting Out (the Smart Way)
improving your credit score can take time. But if there’s any way you can take
public transportation, rideshare, or stretch your current vehicle’s life for a
few months, it’ll be worth your while.
2. Save up for
a down payment, or trade in
this is a step you’ll need to start a few months before it’s time to purchase
your next vehicle. It’s possible to qualify for financing for a vehicle with no
money down. But this isn’t the ideal way to finance a vehicle.
one thing, 100 percent financing will get you a much larger loan and a larger
payment. Plus, putting no money down generally means you’ll have a higher
interest rate. And since cars depreciate quickly, you may owe more on the car
than it’s worth as soon as you drive off the lot.
best bet is to put at least ten to 20 percent towards a down payment. However,
since used cars depreciate more slowly, you can get away with a
smaller down payment on an older car. However, if you have a low credit score,
be ready to offset it with a larger down payment. This can get you into a much
better financing arrangement.
you’re calculating your down payment, be sure to account for the value of your
trade in. Even an older vehicle can bring some extra money to the table when
you’re buying a new vehicle. Use tools like Kelley Blue Book to
figure out about what your trade in vehicle will be worth.
3. Get an idea
of what you need to spend
you have your credit score and down payment sorted, it’s time to start shopping
around. This is where you need to make your list of minimal must-haves for your
vehicle. The shorter this list, the more options you’ll have to choose from.
must-have list might include several features. For example, the amount of
seating or ability to haul extra stuff, a certain level of gas efficiency, or a
certain rating for used vehicles may be important to you. Once you have a
must-have list, start looking around on sites like Edmunds. This will give you
an idea of what you’ll need to spend.
spending level will depend on the type of vehicle you purchase. Larger vehicles
are more expensive, as are newer and lower mileage options. Your goal is to get
what you really need out of a vehicle without spending more than you absolutely
taxes and fees
you can shop for financing, figure out exactly how much you’re likely to pay in
additional fees and taxes. This can include dealer and licensing fees, for one.
want to pay these additional fees in cash. So this can eat into the cash you
have available for your down payment. It’s important to know this before you
shop for financing.
can get an estimate of additional taxes and fees with this car payment
calculator from CarMax. This is just an estimate, but it’ll give you a
starting place. If you want a more specific estimate, check your local DMV/BMV
site or call a local dealership.
your taxes and fees from the cash you have on hand to buy a new car, and that’s
your total down payment amount.
5. Shop around
for financing first
that you have all this done, you might think you’re ready to walk into a
dealer. Not so fast!
don’t often offer the best financing terms, especially for those with less than
perfect credit or those buying used vehicles.
should check at least two or three potential options for financing. Rate
shopping won’t harm your credit score, so long as you do your shopping within a
two-week period. And shopping around can help you find the best possible
should you shop around? You can look online for auto financing, and you can
even compare potential rates with some interfaces. But you should definitely
check out one or two local credit unions, too. They often offer
lower rates and better terms, particularly for those with less-than-perfect
Resource: Get multiple car loan quotes
for free from LendingTree.
6. Opt for a
shorter term when possible
typically give you a few financing options to choose. You’ll likely notice that
a lower term gets you a lower interest rate, as well. Plus, financing for a
shorter terms means you’re taking a bigger bite of the loan’s principal with
every payment. This means that you’re less likely to owe more on the vehicle
than it’s worth at any point in the life of the loan.
course, you don’t want to choose a shorter term than you can’t actually afford.
If you jack your monthly payment up too high, you risk missing payments or
having to make them late. And that can tank your credit score and
lead to additional fees.
7. Show up
with financing in hand
of the advantages of shopping around for financing before you go to the
dealership is that you can use this financing to negotiate with the dealer.
Having secured financing gives you leverage to negotiate for a lower purchase
price on a vehicle. But you can also challenge the dealer to come up with a
better financing option for you, if possible.
won’t always be able to get a better deal, but sometimes you can.
gap insurance, if necessary
you buy car insurance, chances are that it will only cover the car’s current
value. So if you owe $5,000 but total your car when it’s valued at $4,500,
you’ll be on the hook for the extra $500.
those low dollar amounts, that’s not a huge deal. But what if you were on the
hook for a few thousand bucks? This is an expense many of us can’t handle.
where gap insurance comes in. It essentially pays the difference between your
car’s actual value and what you owe to the lender. If you’re able to follow all
these smart financing steps, you shouldn’t need gap insurance because you’ll
have a good down payment.
if that’s just not possible, gap insurance can protect you from going even
further in the hole if you total your car while you’re upside down on the loan.
towards refinancing in the future
what do you do if you can’t follow all these smart financing steps? For
example, what if you have to buy a car before you have time to improve your
this case, start off by doing the best you can. Buy an older, cheaper car, for
one. But then keep an eye on your credit score and auto loan rates. You may be
able to refinance in the future. And if you can trim your interest
rate by a few points, that could be well worth your while!