Key Tips for Financing a Car

In a perfect world, we’d all pay cash for buying a new or used car. But in reality, very few of us have enough money on hand to pay for a car in full. This is where financing comes to the rescue. How much you pay each month, and over the life of the loan, is determined by three key factors.


The principal is pretty straightforward. That’s the amount you intend to borrow to complete your car purchase. The first thing that will happen is you’ll be asked to fill out a credit application. The car dealers will take that credit application and type all the information into a secure platform. Once they have your information in one secure location, they’re able to automatically submit it to as many lenders as they see fit.

Depending on your particular situation whether you’re buying an expensive car or an inexpensive car, they will use their expertise to determine which bank is most likely to offer you the best terms and the best rate for that loan.


Interest Rate

The interest rate is the percentage that the lender charges you to borrow its money. Your credit score heavily influences this rate. In general, the higher your credit score, the lower your interest rate, and vice versa. If you have some credit challenges like you owe too much on your car, or you don’t have that much money down, the lenders will come back and do condition loan.

This means that they’ll offer you the loan if you meet the certain conditions. Also, keep in mind that advertised interest rates are typically available only to those with strong credit scores. So if you have fair or poor credit, you may have to settle for offers at higher rates.


Finally, there’s the loan term, which is the number of months that you agree to pay back the loan including interest. Most qualified car dealers recommend keeping your term to 60 months or less, but it’s not uncommon to find loan terms as high as 84 months. The longer your loan term, the lower your monthly payments will be. But keep in mind that you’ll pay more over the life of the loan.

Loan Preapproval

Before you even start shopping for a car, it’s highly recommended that you get approved for a loan. This will help you manage your expectations for how much you can afford. There are a number of different places where you can get per-approved. Banks and credit unions are the most common institutions. But there are also several online lenders out there.

Rates and qualifications will vary from lender to lender, so don’t be afraid to shop around. Once you’re per-approved for a loan, you can confidently shop for cars within your budget. Approval also gives you a benchmark to compare against special dealer finance offers.

green car


Most dealers work directly with their lenders to offer to finance at lower interest rates than you can find almost anywhere else. Sometimes these rates can be as low as 0%. Having a per-approval in hand will put these special offers in context, and help you make a sounder financial decision.