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Securing Financing for the Purchase of your Car

By: , dated January 25th, 2013

Since a car is a depreciating asset (unlike a house, a car’s value falls sharply every year), we don’t recommend financing your car purchase, unless it’s absolutely necessary. Of course, most car buyers ignore this advice and take out a loan. If you aren’t going to need to borrow money to pay for the car (or lease), congratulations. You should skip ahead to the next step. For everyone else, the next step is to arrange for financing.

Notice that we’re recommending that you get your loan arranged even before you choose what car you want to buy. Many car buyers simply arrange for financing with the dealer that they buy the car from, and while this saves one step, you’ll pay for this convenience, because the car dealer is almost never the cheapest source of financing. Think of it as two separate activities: shopping for a car and shopping for money. There’s no reason to expect that the best place for one will be the best place for the other. Also, getting a pre-approved loan will give you one less thing to worry about when selecting a car, and it will force you to stay within your planned budget.

Talk to your bank to see what terms they can give you on a loan, but don’t be afraid to comparison shop. Compare interest rates from several banks and credit unions, because the rate differences can be substantial. If you own your home, consider a home equity loan, which lets you borrow against the value you’ve built up in your house .

You should expect your down payment to be between 0% and 25% of the car’s purchase price. The average term for a car loan is 4-5 years; a shorter term will mean higher payments but a lower total cost because you’ll be paying less total interest.

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