a guide to car loans and leases

car dealer

If you want to get a good deal, it’s important to know how to finance a car before you walk into the dealership.

KELENY / Shutterstock.com

  • A car is one of the biggest investments you can make, so it’s important to get a good deal out of it.
  • But knowing how to finance a car, whether it’s leasing or borrowing, can be tricky if you don’t know where to start.
  • To get the best rate, start by checking your credit score and making sure it’s good enough to get a lease or loan. Then, make comparisons to find the lowest interest rate you qualify for.
  • Compare quotes and apply for a car loan from LendingTree or CarsDirect »

Unless you live in an area where public transport is plentiful and reliable, having a car available whenever you need it is very important. Cars allow us to get to work, errands, and social events, and unless you can walk everywhere to do these things, a reliable car is your best bet.

That said, a car is one of the most expensive things you can buy, so finding financing is usually the first step towards buying a car.

How to finance a car

1. Check your credit score

As with most things in the financial world, the better your credit rating, the better your options for financing a car. Check a site like Credit Karma to find out your credit score. If you have a very poor to fair score, you may want to consider raising your credit score before financing a car to gain access to deals with better interest rates.

2. Calculate your budget

Before you fall in love with a car, it’s a good idea to define your budget. After all, there’s no point looking at sports cars when you really can only afford something of the standard variety.

If you already own a car, consider buying a new one that would keep your current payments about the same (assuming it works out with your other expenses). If this will be your first car, it’s a good idea to go over your monthly budget line by line to see how much you can actually afford to divert other things into a monthly car payment.

Remember that if you’re financing a car, you’ll likely pay interest and possibly other costs, so keep that in mind when budgeting.

3. Learn the lingo of buying a car

When financing a car, there are some terms you need to familiarize yourself with. Interest – or finance charge – is basically the cost of borrowing money from whatever lender you go with. This will be an additional monthly charge on your loan.

Another important thing to know is the length of your car loan – it’s the number of months you can expect to pay off your loan. In general, the longer the loan, the more interest you will pay over time.

You may need to pay a deposit to purchase your car. This is the initial lump sum of money you spend on the purchase. After that, your monthly payment will be calculated based on the cost of the car minus your down payment (plus interest, of course).

4. Choose from two options: get a loan or get a lease

When it comes to car financing, you have two general options: getting a traditional loan to pay for the car or getting a lease. Leasing a car is similar to leasing, as you return the car to the dealership at the end of the lease term.

If you’re considering a lease, consider how much you’ll actually be driving the car – leases tend to charge per-mile fees on top of the miles included in your contract. The dealership can help you better understand the specifics of leasing if you want to go this route, but a lease may also require a down payment, as well as other lease-related fees and possibly a security deposit.

A car lease can also come from a third-party lender – such as a bank or online finance company – but they are traditionally done directly by the car dealership. Different dealerships may offer different rental packages depending on the type of car you want, whether you want to drive an older version or want something new, etc.

Once you know what car you want, it’s worth calling the different dealerships to see what their rental options are in order to find the best one. As with traditional loans, customers with higher credit ratings will generally have access to better rates and lease packages.

5. Research Funding Options

If you decide to finance through a traditional loan rather than a lease, be sure to do your research. Like any loan, different companies will offer different incentives, interest rates, and financing terms.

If you have good credit, the dealer can offer you great finance rates directly (but you should always do your research beforehand to be sure – you’ll want to know the lowest possible APR you can get). If you have less than stellar credit, it’s even more important to research your options beforehand.

Online lenders, such as LendingTree and CarsDirect, are a good place to start, but large national banks, like Bank of America, are another route, as are community banks and

credit unions

. You can get quotes from these different lenders and then compare the basic details.

6. Compare all numbers, not just monthly payments

While it’s important to keep a monthly budget in mind when comparing financing options, there are a number of other factors you should also consider when deciding on a loan offer, including the amount of interest you will pay over the term of the loan, the term of the loan and any other fees that come with the loan.

Just because a loan costs $50 less per month doesn’t mean it’s the best option overall if you’re actually going to be making payments on that loan for a longer period of time. In general, the more money you can deposit and the shorter the term of the loan you can borrow, the more money you will save in the long run.

7. Apply for funding

Once you have found your ideal loan, you can apply for pre-approval; this can be done online or in person at a bank or credit union. If you want to apply for more than one loan to see which lender ultimately makes the best deal, you can, but you risk hurting your credit score.

Each serious inquiry from a lender will lower your credit score slightly, but some credit bureaus will review multiple inquiries for the same type of financing (i.e. car loan) within a short period of time as a comparison and count all these requests as one. tough investigation. Just be careful and thoughtful during this process and only apply for financing when you think you’ve found the right deal.

You’ll need some basic information for these applications (like your name and address), but you’ll probably also need to answer a lot of questions about your finances and work history. If you can apply for the loan online it might be easier, but if you prefer to do it in person at a bank, it’s worth calling ahead to find out exactly what information you’ll need so you can have it. at hand.

Ready to apply for auto credit? Check out these offers from LendingTree and CarsDirect »

8. Bring your pre-approval to the car dealership

Once you’ve crunched the numbers, done the research, and got pre-approved for the best financing, take it to the dealership and be ready to pick up the car of your dreams (or at least the one that will get you where you need to be). to go).

With your pre-approval ready to go, the car dealership may try to offer you another option, but they’ll have to beat your current offer if that’s the case. If the dealership can’t get you a better finance deal, then at least you’ll still be ready to buy your car since you’ve done the legwork and know exactly how you’re going to pay.

9. Set up automatic payments

To stay in good graces with your lender and avoid lowering your credit score, it’s a good idea to set up automatic payments with your lending company so you never miss a payment.

Related cover of How to Do It All: Money