If you've read How Buying a Car Works, you know the car-sales lingo and the ins and outs of negotiating with a seasoned car salesman. Let's say you've battled for the best deal and finally agreed to a price you can live with -- time to breathe a sigh of relief? Not exactly. Did you know that if you finance a new car through the dealership, the finance person is working on commission? That means that the financing deal you get is still up in the air, although they'll never tell you that. Those things that get added on in the final stages of the deal (extended warranties, undercoating, alarm systems, etc.) are often what the dealership makes the most money on. It's the finance-office person's job to upsell you on those items AFTER you've agreed to a price for the car with the salesman.
In this article, we'll cover the choices you have for financing, what determines the interest rate you get, and how to determine if you're really getting the best deal, as well as some scams to watch out for. We'll even give you a cheat sheet to take with you when car shopping to help you figure out things like whether taking the rebate or getting the zero-percent interest deal is best.
If you're like most people, paying cash to buy a new car just isn't in the realm of possibility. And even if it's in the realm, you may not want to deplete your savings account to buy a new vehicle. This means that you're either going to be leasing the car, or buying the car by financing it. If you're buying, then you're probably financing it through the dealership, a bank or credit union, an online financial institute, or maybe even a family member.
While leasing is good for a lot of situations, it's a whole other animal, so in this article, we're focusing on financing. If you know you want to finance your car rather than pay cash, then you need to do your homework and decide how to get the best financing deal.
If you do have the money to pay cash for your car and are considering doing it, how do you know if it's really the right thing to do? Here are some instances when paying cash really is in your best interest.
- If you could pay more interest by financing that amount of money than you could earn if you invested it or kept it in a savings account of some sort
- If you don't have a very good credit rating and would have to pay a high interest rate to finance (more on this later)
- If you have a lot of debt already but enough cash on hand, and don't want to further damage your credit rating
But if you're like many people, you probably need to finance your car. So in the next section, we'll look at the pros and cons of financing resources and find out how to determine the best rate.