How to Get a Car Loan

• by Julia

• Also try: How to Buy a New Car | How to Buy a Used Car | How to Lease a Car

Introduction

• Unless you are independently wealthy or have been scrimping and saving for the past several years, you will probably need to take out an auto loan to finance your car. Most dealerships provide financing, but they don't always provide the best possible deal on financing.

• It is best to secure financing from your bank or an online lender. If the dealership from which you buy your car can match or better your bank's terms or offers a rebate as part of their financing package, you might then consider using the dealership as your lender.

• How to Get a Car Loan will walk you through securing the best financing package for your new car or vehicle.

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The Parts of a Loan

• If you can't afford to pay for an expensive item like a car, home or college education in full, you can apply for a loan. A loan is exactly what it sounds like—a financial institution or individual lends you the money to pay for an item or service with the expectation that they will be paid back in full plus interest. Lenders naturally prefer to lend money to borrowers who have a history of handling their finances responsibly.

• Loans are made up of a few different components:

Term

• The term of the loan is its length. Will you be paying back the bank, dealer or your parents over 36 months, 48 months or longer? Remember that the longer it takes for you to pay back the loan, the more you will pay in interest.

• BankRate.com advises that you "run like the plague" from lenders offering 72-84 month car loans and aim for a loan term of five years or less—preferably less.

Interest Rate

• The interest rate is the percentage of the loan you're charged for borrowing the money in the first place. Your interest rate will, in part, be determined by your credit history.

• The APR (Annual Percentage Rate) is the best rate to use when comparing lenders. The APR is a way of expressing the "finance charge" you owe on a yearly basis; the "finance charge" includes both the interest and any fees you owe for the arrangement of the loan.

Down Payment

• Your down payment is what you can afford to pay today. The larger the down payment you can make, the smaller the loan you have to take out. That large down payment may even secure you a more favorable interest rate.

• While there are many financing deals for cars that don't require a down payment, it is in your best interest to pay for as much of the car as you can up-front. BankRate.com recommends paying at least 20% of the car's purchase price as a down payment.

Example

• Here's an example of how the math on your auto loan is done:

• If you take out a $15,000 auto loan from your credit union with a 7.5% APR to be repaid over four years, you will owe $362.69 every month. Over a year, those payments would total $4,352,28. Over the life of the loan, you'll end up paying $17,409.12. That's $2,409.12 in interest over the life of the loan.

• Don't want to do the math yourself? Check out The Motley Fool's Monthly Payment calculator.

Step 1: Get a Free Credit Report

• Before applying for financing, get a free credit report. Your credit score is used to determine the interest rate you will pay on your car loan.

• Be careful securing a credit report. There are dozens of fraudulent websites offering free credit reports. The only website authorized to give you a report is AnnualCreditReport.com.

• Visit Mahalo's How to Get a Free Credit Report for additional information including how to get a credit report over the phone or by mail.

Step 2: Contact Your Bank and Online Lenders

• To put yourself in the best possible position while negotiating the price of a car, it's a good idea to have your financing secured ahead of time. You may also find that you get the best interest rates from a bank or online lender as opposed to a car dealership.

• The Motley Fool has several online auto calculators that can help you determine which financing offer is better, what terms make sense in relationship to your budget, what your monthly payments will be and whether it's better for you to finance or outright buy your vehicle.

Compare Bank and Credit Union Interest Rates

• BankRate.com allows you to compare auto loan interest rates across several banks in your city at once. Visit BankRate.com's Auto Loan Rate search.

• Once you've settled on a bank or credit union to finance your car purchase, figure out the loan's terms in complete detail—the interest rate, the life of the loan, etc.

• You don't have to sign on the dotted line just yet. Have the details in hand when you approach the dealer. This way, you'll be in a good position to determine whether or not the dealer's financing package is competitive.

Online Auto Loan Applications

• Applying for an auto loan online is a breeze. If you have good credit, it only takes a matter of minutes to be approved. It doesn't matter whether or not you know how much you'll be spending on a car. You'll be approved to spend up to a certain amount. The lender will then send you a blank check, which you can fill out and sign over to the dealer once you've settled on a price.

• That final price minus whatever down payment you put on your car will be the amount of your auto loan.

• As with banks, do some comparison shopping and get at least three quotes before applying for a loan.

• Capital One Auto Finance
• HSBC Auto Loans
• E-Loan Auto Loans

What to Do if You Have Bad Credit

• The reason you want to get your credit score before you go loan shopping is because applying for a bunch of loans with bad credit will lower your credit score even further.

• If you have bad credit, you want to start with services like AutoCreditFinders and CarDirect Car Loans to help you identify potential lenders.

• For more information on how bad credit can affect your attempts to purchase a car, visit CarBuyingTips.com's Bad Credit Auto Loans, Tips and Scams to Avoid.

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Step 3: Evaluate the Dealership's Financing Offer

• Having already secured financing from a lender other than your dealer puts you in a powerful position. It shows that you are a serious buyer, and it allows you to comparison shop—pitting your dealer's best financing offer against your bank's.

• It may even be advantageous for you to take the dealer's offer because of a rebate being offered and refinance your loan at a lower rate online with Capital One Auto Refinancing or HSBC Auto Finance.

• Use The Motley Fool's online auto calculators to determine which financing offer is better and what your monthly payments will be.

Resources for How to Get a Car Loan

• • Mahalo's Guide to Getting a Free Credit Report
  • Mahalo's Guide to Buying a Car

• CarBuyingTips.com: How to Buy a New Car - Car Loan Financing Tips - Bad Credit Auto Loans
• The Motley Fool: Buying a Car - Auto Calculators
• BankRate.com: Auto Loan Basics: Financing the Deal - Auto Loan Rate Search

How to Get a Car Loan Products and Services

• Amazon.com: New Car Buying Guide 2007 (Partner)
• Amazon.com: Used Car Buying Guide 2007 (Partner)
• Amazon.com: Buying Guide 2008 (Partner)

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