Financing Your New Car
With the average cost of a new car at just over $32,000, paying cash is not an option for most consumers. In fact, depending on make, model and year, many used cars are also out of reach. And yet, it is impractical for most people to go without a car. If you are buying a car, it is likely that you will be financing a portion of it.
Today, car shoppers spend an average of 18 hours on the Internet researching cars, reviews, and pricing before walking into the showroom. They arrive armed with information about what they want to buy and how much they are willing to pay for it.
The savvy consumer knows it is equally important to devote time to researching financing options. There are many factors to consider and doing your homework and shopping a loan can mean thousands of dollars in your pocket over time.
There are several types of car financing available and each has distinct advantages.
- Dealer financing—a convenient option as dealers may shop the loan for you among various lenders and get those lenders to compete for your business. The dealer can leverage the millions of dollars in loan originations and their lender relationships to influence their lender base in a way an individual cannot. They also can provide all services on site including other products to protect your new vehicle and handle your taxes and license tag registration. It simplifies the car buying experience and makes it easy for you to drive off the lot in your new car. Dealers may offer incentives, cash back or rebates, money for a trade-in and low to no interest financing rates. You may not qualify for all of these but do the math to determine which offer is to your best advantage.
- Commercial Banks—adept at offering a broad range of personal loans and may offer numerous financing options, flexible terms, and customer discounts.
- Credit Unions-may offer competitive rates. Credit unions are non-profit member based organizations that offer highly personalized service and educational financial resources. They offer the benefit of being locally focused based on their charter.
- Home Equity Loan—some may question the wisdom of tying your car to your house, but the fact that some of the interest is tax deductible may make this an option worth considering.
There are numerous factors that determine your loan eligibility and ultimately your interest rate including your credit score, income, debt-to-income ratio and bill payment history. Geographical location may also impact interest rates. In general, used car loans will also be more expensive than new car loans. You can arm yourself before approaching a lender by checking your credit score with FICO. If there are any mistakes on your report you can address them before applying for a loan.
You will also want to “shop” your loan. In order to do this you need to look at the out the door price and other factors. Consider the total cost of ownership which includes taxes, insurance, lowest rate of depreciation, fuel economy, insurance premiums, and maintenance and repair costs. Edmunds.com offer its True Cost to Own calculator.
In short, there are many websites, automotive and finance blogs and other resources that can assist you in understanding financing and making a sound decision.