Unless you are a wealthy, can-afford-everything kind of person, the odds are big that you will need to get a loan to finance a fraction of your new car purchase.
There are several options to choose from like leasing, bank financing or dealer financing. But before you jump into applying for that car loan, there are some important matters that need to be done.
First of all, the interest rates that these financing companies offer are not always the same. So how do they determine the interest rate to approve for your loan application? One of the important things that they check on is the applicant’s credit report. The lower the credit report rating, the higher the interest rate these financing companies will impose on the applicant. Thus, it is best to first obtain a copy of your credit report before anything else. Scan the report for possible errors that may have made the rating lower than it should be. If none, see if you can pay off one or two credit cards to further improve your credit report rating. This is a must before you start applying for that loan.
One more thing to do before filing the car loan application is to check the current market price of the car you are eyeing for, as well as the going rates of car financing at the moment. It is best if the car that you will be purchasing has low depreciation rating. These financing companies can give better financing schemes especially if the car can hold its value well.
Once you have done your homework, it is now time to choose which type of financing to go with. Dealer financing may have higher rates compared to other lenders, but they also have some edge over the others. One advantage is having to contact only a single company on both your buying and financing needs, like the so-called one-stop-shop. They even offer rebates and other good deals sometimes. Once you already got the rebates and approved financing, then you have the option to have the car loan refinanced through other lending companies for a much lower interest rate. This means double benefit to you.
A good resource to help you decide the right financing for your car is the Federal Trade Commission’s booklet titled “Understanding Vehicle Financing.” This can be downloaded for free from the Federal Citizen Information Center’s website. With this booklet, you will be aware of the different facts of dealer financing, steps on how to apply for one, cash back, rebates and other special financing offers.
Now, if you are thinking a buying a car privately, like from a friend or colleague, it may be difficult to get a car loan from banks and credit unions. The good news is there are a couple of lending institutions now who can grant loans for private sales. These are E-loan.com and Capital One Auto Finance. The interest rates, however, for this type of loan is a bit higher than the usual market rate but can still be considered competitive.
In the end, it is still up to you on which financing institution to choose. It is a good practice, though, to scout for the one that can give you the lowest interest rate and best financing scheme there is.