The vast majority of shoppers have to take out a loan to buy a new car. If you have the cash to pay in full, that is the best financial position since you will not have to pay any interest on a loan. People think that obtaining affordable auto financing is a painful, humbling or potentially embarrassing process—and often they're right. However, there are ways to be informed and to ensure that you make a smart decision that puts you in the best position to buy.
Determine How Much You Can Spend
Before you do anything, evaluate your budget and determine how much you can afford to spend every month. Financial experts believe that you should not spend more than 20% of your monthly income (before taxes) on car payments. Take your rent/mortgage and other expenses into account and determine how much you can pay for a new car. Determining how much car you can afford knocks down the first domino of your new car purchase.
Figure Out What Cars You Can Afford
Instead of finding a car and then figuring out how to finance it, use a reverse payment calculator to find out what cars you can afford. Simply input your desired monthly payments, desired term and down payment amount and we'll give you a list of cars that fit those criteria. There are plenty of new cars out there that can fit your needs and are well-within your budget, so don't get greedy!
Do Your Homework
You are not only in the market to buy a new car, but to do so at the lowest cost, and spending less on a new car starts with your car loan. 73% of all new car purchases are financed, so unless you are in the remaining 27%, you will have to either take out a loan or finance through leasing. There are many different loan types with varied interest rates and term lengths, so doing your homework to find the most cost efficient loan is very important.
Count Your Cash
If you have enough money to buy a new car outright, do it! If the space under your mattress is filled with cash and you can afford to buy a new car without taking out a loan or agreeing to a lease, you will end up saving the most money. If the bed is bare, then you will have to finance, but using whatever cash you have on hand can still lead to savings. The more money you use as a down payment, the less money you will spend on interest; it's that simple. A four-year loan at an interest rate of 7% on $16,000 instead of $20,000 will shave $600 off the total cost. Not only will you save $600 in interest, but you will lower your monthly payments from $478 to $383. Experts advise paying at least 20% of the price of the car as a down payment to help minimize your monthly payments. You can also use the value of your trade-in to get as close to 20% as possible. Calculate your down payment, interest rate, and other factors to get an accurate auto loan estimate.
Know Your Credit
Find your FICO, also known as your credit score. Even if you have excellent credit, it is to your benefit to find out exactly what your credit score is. It will determine what loan rates you qualify for, which translates into how much interest you will pay during the period of your loan/lease. Most people don't know their score and usually are afraid to find out. However, if you have bad credit, it is much better to know it before you're trying to negotiate a low payment at the dealer. You never know though — you might be pleasantly surprised by your credit score.
An example of how your credit might affect how much you end up paying: If a car costs $26,000:
Check the Term
In loan speak, the number of months to pay off the loan is called the term. The shorter the term, the more you'll save. REMEMBER: Each payment you make means more interest you're paying.
Be Wary If You Have Bad Credit
If you have poor credit, you will not be eligible for those great low rates that the dealer is advertising. You may be able to get a better rate by shopping around at your local bank or credit union. If your credit is spotty, there are often other loan options.
Explore Your Options
There are three places to obtain financing.
TIP: NEVER roll an upside down loan on a trade-in into a new car purchase. Why? Because you will immediately be upside down in your new loan, which, as I mentioned before, is a very risky place to be.
TIP: Get a flexible loan if you can. A flexible loan allows you to increase your monthly payments, or pay it off completely if you are able to do so.
BOTTOM LINE: Cash is the bottom line. The best way to save money on a new car is to have as much cash as possible at the time of purchase. The more cash you can pony up front will trim down your monthly payments as well as the interest you will pay over the duration of your loan/lease. Saving is the name of the game. If you save your cash for a big down payment, you will be saving money in interest over the term of your loan, while having lower monthly payments as well.