Buying A New Car

By Eric Christensen

January 13, 2014 5 min read

Buying a car can be overwhelming. On the one hand, there is the excitement of a big purchase and the promise of future road trips. But on the other hand, there is the pressure of a fast-talking salesman and the confusion of seemingly endless details. While most people tend to focus on sticker prices, they should perhaps be focusing on how best to finance the car instead. There are several options available to car buyers, and if buyers plan ahead and weigh the various pros and cons, they could end up saving thousands of dollars over the lifetime of the car.

One of the most common ways to buy a new car is to arrange for financing at the dealership during the time of purchase. This is the easiest and most convenient way to finance a car, as the paperwork can be signed on site, even late at night or on weekends when banks are closed. And depending on the time of year, sales that offer generous terms, such as "$0 down, 0 percent financing," can be unbeatable.

However, some buyers may not qualify for these generous terms because they lack an ideal credit rating. A bad credit rating can mean paying a much higher interest rate -- perhaps even well above the market rate for car loans -- which means more of your money will unnecessarily be going to the dealership.

Additionally, the dealership might tweak the financing to compensate for other terms the buyer has changed during negotiations. For example, if a buyer pushes for a price discount, the dealership might increase the interest rate on the financing. Or if a buyer intends to pay off the car quickly, a dealership might structure the loan so that the buyer has to pay more interest during the early life of the loan. These are only some of the reasons why many financing departments generate a substantial portion of dealerships' profits. To push back against such tactics, remember that just as buyers should negotiate prices of cars, they should negotiate the terms of financing, as well.

Another option is to secure financing at a bank or credit union prior to purchasing a car. Although this is not as convenient as arranging financing through a dealership since a buyer must visit a bank during business hours days or weeks before purchasing a car, the benefits might outweigh the inconvenience. Not only can a buyer work with their preexisting bankers instead of high-pressure salesmen, but banks and credit unions will probably offer more competitive rates. Bankers can also provide advice on what prices buyers should pay for their new cars.

Buyers should also look into online banks when arranging financing. Although buyers will not have the same personal relationships with online bankers, some institutions offer excellent rates -- sometimes even better than some commercial banks and credit unions. Although there have been some security issues with less-than-reputable online banks, buyers can identify secure, reliable online banks with a few minutes of research.

A final alternative is to pursue financing from alternative sources. One such source is a home-equity loan. Although this type of loan offers market rates and some tax benefits, it also means putting your home up as collateral. If buyers falls behind on paying off these loans, their houses could be taken away. Another source of financing is to take a loan from a friend or family member. Although this can sometimes translate to below-market interest rates and an extended payback period, loans of a substantial size have the potential to damage personal relationships, perhaps irrevocably.

Ultimately, the best way for a buyer to finance the purchase of a car is to do some research in advance, consider all the options and make the best decision for his or her circumstances. Perhaps that limited-time offer really is the best option. Or perhaps a buyer's bank or credit union can offer rates a dealership can't, or won't, match. Like every other step of the car-buying process, proper preparation pays off.

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