How Car Financing Works

Cheat Sheet

­ ­We've put together the most important information from this article in the form of a "cheat sheet" you can take with you when you go car shopping. First, we'll start with the top 10 things to do both before you go to the dealership and while you're there, and then we'll go over some terminology.

  1. Get a copy of your credit report and correct any errors that are lowering your credit score (errors in credit reports do happen -- probably more often than you think).
  2. Have a copy of your accurate credit report with you when setting up your financing at the dealership.
  3. Know the MAXIMUM amount you can spend on the car -- not just the monthly payment, but the actual car price.
  4. Visit the manufacturer's Web site to see what special incentives, rebates, or other deals that you may be able to take advantage of. Many of these are available whether or not you finance at the dealership. Print them out so you're armed when you're negotiating with the dealer.
  5. Visit Kelly Bluebook or Edmunds to find the value of your existing car if you plan on trading it in. (You might also visit your mechanic to get a list of repairs the car needs and their associated costs so that when the dealership tries to deduct money for those repairs, you will know what a fair amount is.) If the dealer won't give you a fair price for your car, then don't trade it in -- sell it yourself.
  6. If you know which car you want to get, go to the manufacturer's Web site and print out all of the pricing information so you know what the car should cost with the features you want. Take that with you to the dealership.
  7. Shop for loans from banks, credit unions, and online financial institutions and take detailed cost and interest-rate information with you to the dealership so you can compare things like the APR, whether the loan is front-loaded or simple interest, application fees, loan terms, and prepayment penalties. Or, go ahead and get the loan and go to the dealership as a cash buyer.
  8. Remember that increasing your down payment with rebate money to lower the financed amount is often a better deal than 0% APR.
  9. Have any rebates mailed directly to you rather than letting the dealership "apply them to your down payment." Take money from your savings to pay the down payment and then replace it when you get the rebate check from the manufacturer.
  10. Finally, don't be afraid that you're taking all profit away from the dealership. Even if they say they're selling the car to you at their invoice cost, they're still making money due to "holdbacks" and other dealer incentives from the manufacturer.