How to Finance a Car (Without Going Broke or Losing Your Mind)
Buying a car is a love/hate relationship no matter how good your finances are. It's just one of those necessary evils for the majority of America. Here's how to finance a car without going broke or losing your mind.
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Ah, the thrill of the open road! There's nothing quite like the freedom of cruising down the highway in your very own car. But unless you've got a wad of cash burning a hole in your pocket, you're probably going to need to finance your ride.
Don't worry, it's not as complicated as it sounds (but it’s also not a black & white decision either). Here's our guide to financing a car without going broke or losing your mind.
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What is Car Financing?
Financing a car simply means borrowing money to pay for it. You agree to pay back the loan (plus interest) over a set period of time, usually a few years.
In exchange, you get to drive the car right away, even if you can't afford to pay for it in full upfront. Sounds simple enough, right? Well, it can be, but there are some things you should know before you sign on the dotted line, including:
- The process for financing
- How to get a loan in the first place
- How much you should ideally put down
- Alternatives to financing
Let’s start with the how-to.
How to Finance a Car
There are three different ways to finance a car, so it's worth doing your research to find the option that works best for you. Here are some of the most common ways to finance a car:
- Dealership financing: This involves obtaining financing through the dealership where you are purchasing the car. While convenient, it's important to carefully review the terms and rates to ensure you're getting a fair deal.
- Bank or credit union loans: You can also obtain financing through a bank or credit union. Rates may be more competitive, but the application and approval process can take longer.
- Online lenders: Online lenders may offer more flexible terms and faster approval times, but be sure to research the lender and read reviews before applying.
How to Get a Car Loan
Getting a car loan involves finding a financing lender, finding a car, and pretty much sealing the deal with paperwork. But of course, it's not that simple. Once you've found the right lender, it's time to get pre-approved for an auto loan.
This means the lender will review your finances and credit history to determine how much they're willing to lend you and at what interest rate. It's a good idea to get pre-approved before you start shopping for a car, so you know exactly how much you can afford to spend. Let's unpack the details below.
The 8 Steps to Getting a Car Loan
Getting a car loan can seem daunting, but it doesn't have to be. With a bit of preparation and research, you can secure a loan that fits your needs and budget. Here are eight steps to follow to get a car loan:
- Check your credit score
- Determine how much you can afford to borrow
- Research financing options
- Gather your personal docs and information
- Get preapproved for an auto loan
- Put 20% down
- Pay for sales tax, fees, and "extras" with cash
- Compare all the numbers, not just monthly payments
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1. Check your credit score and credit report
Before applying for a car loan, it's a good idea to check your credit score and credit report. Lenders will use this information to determine your creditworthiness and the interest rate they're willing to offer you.
You can obtain a free credit report from each of the three major credit bureaus once a year. Look for any errors or inaccuracies in your report that could be dragging down your score.
2. Determine your budget and down payment amount
Before shopping for a car loan, you should have a clear idea of your budget and how much you can afford to spend on a monthly payment. You'll also want to consider how much you can afford to put down as a down payment.
Ideally, you should aim to put down at least 20% of the car's purchase price to minimize the amount you need to borrow and to get a better interest rate.
3. Shop around for lenders and compare offers
Don't just settle for the first lender that offers you a loan. Shop around and compare offers from different lenders to find the best deal.
Look for lenders that specialize in auto loans and compare interest rates, fees, and loan terms. Getting multiple offers and comparing them can help you save money over the life of the loan.
4. Gather necessary documents and information
Before applying for a car loan, you'll need to gather some important documents and information. This typically includes proof of income (pay stubs, W-2s, or tax returns), proof of insurance, and proof of residency.
You may also need to provide personal references and information about the car you're purchasing.
5. Submit your application and wait for approval
Once you've gathered all the necessary information, you can submit your application for a car loan. The lender will review your application, credit history, and other factors to determine whether to approve you for the loan.
This process can take a few hours, days to a few weeks, depending on the lender. (Typically it's all within a day).
6. Finalize the loan agreement and purchase the car
If you're approved for the loan, you'll receive a loan agreement that outlines the terms of the loan. Be sure to read the agreement carefully and ask any questions you may have.
Once you've agreed to the terms, you can finalize the loan and purchase the car. The lender will typically send the loan funds directly to the car dealer or seller.
7. Pay for Sales Tax, Fees, and "Extras" with Cash
Don't forget about the additional costs that come with buying a car, such as sales tax, fees, and "extras" like extended warranties or gap insurance.
It's a good idea to pay for these expenses with cash, rather than financing them along with the car. That way, you won't end up paying interest on top of interest.
8. Compare All the Numbers, Not Just Monthly Payments
When you're shopping for a car loan, don't just focus on the monthly payments. Be sure to look at the total cost of the loan, including the interest rate, fees, and any other charges.
- Compare APRs (annual percentage rates) rather than just interest rates, as APRs include all of the fees and charges associated with the loan.
- Shop around and get quotes from multiple lenders to find the best rate.
- Consider the length of the loan term and how it will impact the total cost of the loan.
Alternatives to Financing
If financing a car doesn't sound like the right option for you, there are other alternatives to consider, such as leasing, paying with cash, or using a personal loan.
Personal loan: You can take out a personal loan from a bank or credit union to finance your car purchase. Personal loans may have lower interest rates than car loans, but they may require collateral or a co-signer.
Lease: Leasing a car can be a good option if you want to drive a new car every few years. Lease payments are typically lower than loan payments, but you don't own the car at the end of the lease term.
Car subscription: Car subscription services allow you to pay a monthly fee to access a car without the commitment of ownership. Subscriptions may include insurance, maintenance, and roadside assistance, and you can switch to a different car or cancel the subscription at any time. However, subscription fees may be higher than loan payments or leases, and you don't own the car at the end of the subscription period.
FAQs About Financing a Car
There are a lot of questions that come up when you're financing a car, such as "Can you finance a used car?" and "What's the difference between APR and interest rate?" We've got you covered in our FAQ section.
What is car financing?
Car financing is a way to purchase a car by borrowing money and paying it back over time, usually with interest.
How do you finance a car?
There are several ways to finance a car, including through a bank or credit union, a car dealership, or an online lender.
What are the benefits of financing a car through a dealership?
Financing a car through a dealership can be convenient and may offer promotional rates or deals. However, always compare the rates and terms with other financing options to ensure you're getting the best deal.
What credit score do I need to finance a car?
We suggest at least 690 for the best options but the minimum credit score required to finance a car varies by lender. Generally, a higher credit score will qualify you for better interest rates and loan terms.
Should I get preapproved for a car loan?
Yes, getting preapproved for a car loan can help you understand what you can afford and give you bargaining power when negotiating with a dealership.
How much should I put down on a car?
As much as you can afford but the rule of thumb is 20%. This is to avoid negative equity and higher interest rates.
What should I look for when comparing financing options?
When comparing financing options, look for more than the monthly payment. Consider the interest rate, loan term, down payment, and any additional fees or charges.
Can I refinance my car loan?
Yes, you can refinance your car loan to potentially lower your interest rate and monthly payments. But keep in mind you're subjected to another hard credit pull.
How can I save money on car financing?
To save money on car financing, you can negotiate the price of the car, shop around for the best interest rates, and avoid add-ons that you don't need.
Is it better to buy or lease a car?
We always suggest buying over leasing. With buying used being preferable over buying new. Buying and leasing both have their pros and cons, and the decision depends on your individual circumstances and preferences. Consider factors like how much you drive, how long you plan to keep the car, and your budget when deciding which option is best for you.
Pepper's Tips for Financing a Car
Buying a car is a big purchase and a big deal. Many of our friends and family have found themselves trapped in a bad car loan, owing way more than the car is worth and being stuck paying for it for 6+ years (😤).
So before you apply for a car loan, there are some things you can do to improve your chances of getting a good deal.
- 💡 Consider buying a used car: Used cars are often less expensive than new cars and can still provide reliable transportation.
- 📅 Time your purchase: The end of the year or the end of a month can be a good time to buy a car, as dealerships may be more willing to negotiate to meet sales quotas.
- 🚗 Don't fall for add-ons: Avoid paying for unnecessary add-ons, like extended warranties or paint protection, that can add to the cost of your loan.
- 📝 Read the fine print: Be sure to read the terms and conditions of your loan agreement carefully, including any fees or penalties for early repayment or late payments.
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