How To Buy A Car: Financing Options
There are two common types of car financing: direct lending and dealership financing.
Direct lending includes loans from banks, credit unions, and finance companies. You can compare interest rates and loan terms with direct lending, and you might be able to get pre-approved for a loan before you start looking for a car. If you have strong credit and want to avoid the potential interest rate markup that comes with dealership financing, direct lending can be an excellent choice. Dealership financing is an option if you prefer to finance at the dealership where you’re buying your car. If you opt for dealership financing, you’re essentially seeking financing through the dealer. In this case, you and the dealer enter into an agreement in which you purchase a car and agree to make payments over a specified period, covering both the amount financed and a finance charge. The dealer will often sell the agreement to a financial institution or credit union, which will then manage your account and process your payments.
When shopping for a car, it’s important to compare financing options from multiple creditors and dealers. Don’t focus solely on the monthly payment, as the total amount you’ll pay depends on the negotiated price of the car, Your annual percentage rate (APR), and length of the loan. Be wary of longer-term loans, such as 72 or 84 months, which may have lower monthly payments but higher rates and overall costs. Credit insurance is not required by federal law, and before buying, consider the cost and whether it’s worth it. Also, be aware of auto add-ons, such as gap policies or extended warranties, which are not free and may be financed along with the car.
Ask the dealer about manufacturer incentives, rebates, discounts, or special prices that you may qualify for. Negotiate the APR and payment terms with the dealer, just as you would negotiate the price of the car. If you have a pre-approved financing offer, compare it with the dealer’s offer to determine the better deal. Before signing the contract, ask questions about the terms and ensure they’re final and fully approved. Verify that the price on your contract matches what the dealer sent you ahead of time. If the dealer is still working on the approval, consider waiting to sign the contract until the financing has been fully approved.