Buying a car, whether new or used, is a major purchase. Buyers often need to finance a good part of the purchase price and all the extras, such as a service contract or other add-ons. Make sure you know your financing options before you go shopping.
Start by researching the basics like how much can you afford and what kinds of financing are available. The Federal Trade Commission (FTC), and other consumer and trade organizations have resources to help. This article will also cover several key areas.
You should first get an idea of the total loan amount and monthly payment you can afford. You might be surprised at the amount you have to pay each month in order to buy a particular vehicle. Car payments in the $300-500 range, or more, aren't uncommon. Many loan calculators and spreadsheets are available online to help you run the numbers. Find these tools on automotive or banking websites. Also, the FTC website has a budgeting worksheet so you can see the impact of a new loan payment on your budget.
Shop around online for the range of available interest rates. If you've recently checked your credit report, you might have opted to pay a fee to see your credit score. You'll have a better idea of the interest rate you can get if you know whether your score is high, average, or low. (To get the lowdown on how credit scores work, see Nolo's article Your Credit Score: What It Is and Why It Matters.)
Look at the big picture before deciding on your budget. Think ahead about your credit and finances; if you're planning a major purchase, like buying a new home by taking out a mortgage, an auto loan with a high monthly payment and long loan term could impact your ability to get another loan.
The two main sources for vehicle loans are car dealership finance offices and direct lenders, such as your bank, an online lender, or your local credit union.
Dealership financing offices can give you one-stop shopping and loan offers you won't find elsewhere. Once you complete a credit application, the finance manager can search for the right loan product. Car manufacturers have finance companies and offer promotional loan products and rebates, such as low or zero percent financing or cash back on a deal. (To learn how to avoid common financing scams, see Vehicle Financing Scams.)
If you obtain financing from a direct lender, the loan proceeds are used to pay the dealer for your car. Some advantages of using a direct lender are you won't have to deal with the dealer's finance office as part of your shopping trip, and you might find a good deal on a loan, especially from lenders with which you have current accounts, like your credit union.
With either loan source, your credit score, credit history, and finances matter. Most of the loan underwriting process is automated, with sophisticated computer programs doing the work. Your credit data goes in, and the proposed loan terms are returned.
If your credit reports contain errors, and as a result your credit score is lower than it should be, you probably won't get the best terms possible on the loan you're offered. So, make sure you review your credit reports and clear up any inaccurate information before you apply for financing.
A number of federal laws, such as the Truth in Lending Act and the Fair Credit Reporting Act, protect consumer rights in financial transactions. These laws require protections like disclosures about your loan so you know the interest rate, payment amount, late fees, and the total amount you'll pay in interest over the life of the loan. State laws often provide added consumer rights.
When you've decided on your loan, read through the loan contract. Look for all the key terms, such as the interest rate and payment information, and ask your loan officer questions if there's something you don't understand. Also, ask when your first payment is due. Don't start with a late payment.
Your lender will likely keep your car's title until the loan is paid in full.
