How Car Financing Works

Why You Should Shop for a Loan

­To avoid having to deal with the potential scams and high costs of financing through the dealership, you may want to explore all of your financing options before you get to that point. By preparing yourself with good information and knowin­g what your options are, you can make a much better financial decision. Don't let the excitement of driving off the lot in that new car distort your perspective on things and cloud your judgement. That's just what the salesman wants!

Before you start shopping for cars, you should shop for the money to buy a car. Before you can shop for the money, however, you have to figure out how much of a car payment you can afford to pay each month. Once you know how much you can afford, use one of the hundreds of online car payment calculators to find out what that total car purchase price can be. You'll need to know the current average interest rates for car loans before you can calculate that, so also visit an online banking site to see what the best interest rates are at the time.

Here is an example of how this would work. Let's say you've looked at your budget and know you can afford a monthly car payment of $300. You've also looked at interest rates and see that the average rate is around 6% right now. If you know you are willing to pay that $300 every month for the next five years, then, calculating backwards, you'll know to look at cars that cost around $13,000. Try this calculator if you don't want to have to figure out your budget first.

By approaching the car buying monster from this angle, you can more easily end up with a car you can afford (even if you don't end up with the car you've been fantasizing about). Still, this is the smart way to go about it. Don't wait until you're at the dealership, talking with the salesperson, to figure out the total car price you can afford. Of course, that's what they would like you to do; and they only want you to think about that monthly payment, because they can always stretch out the term of the loan to get close to the payment you want to make. Plus, remember the funny thing about perspectives. As a buyer, when telling the salesman you want a payment around $300 and no higher than $350, you know you're leaning toward the $300. The salesman, on the other hand, hears only the high number.

Now that you know why it's important to get a loan first, read on to learn how to shop for a loan.