How to Finance a Car Purchase

When you’re in the market for a new car, it’s important to have all the information you need. You’ll want to know what your maximum loan amount is, and get preapproved.

You’ll also need to learn how to negotiate. Be prepared to quote a lower figure if the salesman is pushing you up to your max.

Getting Preapproved

Get preapproved before you visit a car dealership to cut down your time in the finance office and give yourself financial peace of mind. The process involves providing personal identification, proof of income and a credit report. You may also be asked to provide documentation that includes your debt-to-income ratio, a list of current expenses and other factors that can affect your creditworthiness.

While loan preapproval is not a guarantee that you will receive terms, the information gathered during this process helps lenders determine whether to fund your purchase. It also gives you a firm understanding of the budgeting boundaries you need to stay within.

Moreover, you can use your preapproval as leverage when negotiating price at the dealer. This will enable you to shop like a cash buyer and avoid adding unnecessary add-ons that can end up costing more than the initial purchase amount.

Researching Automobiles

There are a few different ways to finance a car. You can buy it outright, lease it or borrow money to purchase it. When you buy a vehicle outright, you pay the entire purchase price up front. This option has the benefit of allowing you full ownership of your car after payment in full. Many buyers choose to borrow money to buy a car, which can be done through an auto loan. These loans are typically for 3-6 years and you will be paying both principal and interest over time.

Before you start shopping for vehicles, it is best to establish a budget and focus only on cars within your price range. Remember, you will also need to factor in the cost of car insurance, road tax and maintenance. Be sure to research any rebates, discounts or special prices that may be available. You can use an auto loan calculator to see how different loan amounts, interest rates and loan terms will affect your monthly payments.

Finding a Dealership

Most people need an auto loan to buy a car. Dealers offer their own financing, but you can also shop around for loans through banks, credit unions and online lenders. Getting preapproved before you go to the dealership gives you leverage during negotiations, and it can help you avoid dealer markups.

If you want to save money on interest charges, consider paying for part of the car in cash and financing the rest. This reduces the total cost of the car, because you are only paying for what you actually use the vehicle for.

Ask dealers about manufacturer-sponsored programs, like lower finance rates on certain models. These often require a special credit rating or specific vehicle requirements. Regardless of what you choose to do, make sure that you get all the terms of your agreement in writing. This includes the negotiated price of the car, your credit terms and the length of the contract. Also, double-check that you have proof of insurance before you drive off the lot.


It’s important to understand how much you should pay for a vehicle before entering the dealer’s financing office. This is where dealers often try to sell you protection plans, service contracts and other add-ons that can increase your cost by thousands of dollars.

You should start by asking for the car’s out-the-door price, or total selling price including any fees and taxes, and request an itemized breakdown to see how that number was reached. This helps you avoid dealerships inserting bogus charges or inflating documentation fees to make a profit.

If a salesperson tries to focus on the monthly payment instead, point out that they’re sacrificing the overall value of the vehicle by increasing its term and thus incurring more interest in the long run. If they’re still insisting on selling you the car, be prepared to walk away if necessary. Having a backup person can help keep you objective and serve as a voice of reason.

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