What should you know about how to finance a car?

When you decide to purchase a vehicle, you need to find a way to finance the purchase unless you have enough money to pay cash. Many people will need to apply for an auto loan. You have the option to apply for a loan before visiting the dealership, or you can apply when you walk into the dealer's finance office. Taking time to research how to finance a car before you visit a dealer can help you ensure you get the best deal when applying for an auto loan.

Steps you should take before buying or leasing a vehicle 

Preparing yourself before you walk into a car dealer is highly recommended. Do your research and come with all the necessary documentation. This preparation can help you secure the best deal when you enter the finance office to talk numbers. Discover a few recommendations before you go car shopping in person. 

Order a credit report 

Start by ordering a copy of your credit report. Your credit report contains important information that can impact your ability to qualify for an auto loan. If you find any errors, report them immediately.

Get the vehicle price in writing 

Before discussing financing, agree upon a price for the vehicle and get it in writing. You want to ask for the out-the-door price, which means the cost plus taxes and fees. Having this information makes it easier to watch out for fees and add-ons that some dealers might try to slip in. 

Understand your overall cost, not just your car payment 

Before agreeing to finance a vehicle, you need to understand the overall cost of your car. It's easy to be tempted by low monthly payments, but you must consider the overall cost of a new car. Lower monthly payments might mean higher interest rates and an extended payoff period. Look at the overall amount you're repaying. Saving $25 a month could mean you're paying for a more extended time and a higher interest rate. 

Save for an additional down payment 

If you don't need to purchase a vehicle right away, consider saving additional funds toward a down payment. A larger down payment will reduce the overall amount you plan to finance or lease. 

Decide on a budget 

As you are going through the planning process, you need to set a budget. Be realistic about what you can afford and what you need. While the idea of buying a fancy new sports car sounds great, can you truly afford it? If you are ending one auto loan, it's best to stick with a monthly payment in line with what you are used to paying for your vehicle. 

If this is your first auto loan, you need to look carefully at your finances. You don't want to get yourself into an unrealistic financial situation with a car payment you cannot afford. 

Determine what to do with your vehicle trade-in 

Do you have a vehicle to trade in with a dealer? Research options to get the most money for your existing car. Start by identifying the trade-in value through reputable online sites. 

Do you still owe money on your car? If so, trading it in might not help. If you owe more than the vehicle is worth, you must pay off the remaining balance. This payoff could impact your new vehicle financing. It may make more financial sense to sell your vehicle rather than trade it in. 

Financing options for a vehicle purchase 

Direct lending and dealer lending are two main methods of financing a vehicle purchase.

Direct lending 

Direct lending occurs when you borrow money from a financial institution, such as a credit union. You can apply ahead of time before you even decide on a vehicle. This type of financing can help you better understand what you can reasonably afford. 

One benefit of direct lending is you can receive preapproval before starting your car shopping search. You'll have all the loan terms, including your interest rate and loan length. The better your credit score, the lower the annual percentage rate (APR) you might receive on an auto loan. Having this preapproval allows you to better comparison shop. You can also use your preapproval offer to negotiate a better purchase price. 

Dealer financing 

The second option for financing is through the dealer. You would enter a financial contract with the dealer who sets the amount of financing and payment terms. Then, the dealer will typically sell your loan to a finance company, bank, or credit union to collect your payments. 

While dealerships might offer different financing options, they may not always have the best terms. The dealer will always try to sell you on dealer financing because they profit off these contracts.  

Watch out for dealer add-ons and fees 

Car dealerships want you to finance through them because they can make money off the interest of a car loan you get through them. The dealer might tell you that credit insurance is required for your loan if you become disabled or die. However, federal law doesn't require you to purchase credit insurance. It's against the law for a dealer to try and include it without your permission. 

Watch for other add-ons such as extended warranties, gap policies, and service contracts. You have the right to say no and understand what you are paying for in a vehicle purchase contract.

Potential ways to save money on your auto loan 

When you walk into the dealership finance office, you also have the right to ask about ways you can save money on your auto purchase. For example, ask about manufacturer incentives. You might find out there are incentives, such as receiving cash back on specific vehicle makes and models. 

Ask whether you qualify for any special prices, discounts, or rebates. Dealers that offer any of these items must clearly explain what you need to be eligible to receive. Ask about any restrictions. Some deals may require you to be a military member or a recent college graduate. Do not assume that the dealer is automatically including any applicable rebate in the price or financing terms. You'll want to get all the deals in writing to review each item before signing. 

Looking for a car loan?

Get an Alliant auto loan quickly online with same day approval in most cases.

Want to learn more about applying for an auto loan? Here are several articles to read: 

• Is it better to get a car loan at a bank or credit union?
• How is a car loan calculated?
• Should you refinance your car loan?