Car Loan Basics

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I’m buying a new car this weekend. My husband and I considered spending our entire emergency fund to pay cash for the car, but then we took a look at the budget and decided it was too big a risk. So, we’ve decided to get a car loan. Rates are pretty reasonable right now for people with our credit.

Car Loan Sources

You can get a car loan from various sources. Dealers may or may not be a good option. I also checked out credit unions and big banks.

Dealer Loans

Obviously, a dealer wants to give you the loan because they make more money that way. However, a dealer may not be the best option. The Mazda I considered came with 0% financing from the manufacturer. I seriously considered that offer, because our credit allows us to qualify for it. Ultimately I decided I liked a different car better, but it was tempting. Toyota was offering 2.9%, which is also better than bank rates. If you have great credit and can qualify for those rates, then dealer financing is probably the best option.

Credit Union Loans

Traditionally, credit unions have lower auto loan interest rates than banks. The credit unions I investigated were at 4.49% for loans over $15,000. After tax, title, and license in California, any car I buy will exceed that number. However, rates vary by location, so a credit union should be high on your list for potential car loans. If your credit isn’t great, a credit union should be your first stop for reasonable rates.

Bank Loans

If you have good credit, you should also check out rates at your local bank. I discovered that Bank of America was offering rates as low as 3.49%. I ultimately qualified for a 3.7% loan. The car I opted to buy has 3.9% dealer financing, so I’ll definitely be using my own financing. However, bank rates are usually much higher if you have poor credit.

Loan Co-Signers

My husband will be co-signing my loan. Since we’re married and co-responsible for the debt anyway, there’s no risk in this situation. However, you shouldn’t co-sign a loan, or ask someone to co-sign your loan, if you’re single. No matter how good your intentions are, there is always a risk of that you’ll run into trouble and someone else will get stuck with your payments or see their credit dinged. Friends don’t ask friends to damage their credit! If you can’t qualify for the loan on your own, you need to buy a cheaper car. Consider a used car, even.

On the flip side, many an unmarried couple has purchased a car together, or with one partner as a co-signer, only to break up later. What happens if your partner has financial trouble after the break-up and you get calls from debt collectors for property you don’t possess?

How the Loan Process Works

About a week before you go to buy the car, apply for a loan online. I received instant approval, but the bank called the next day to review the terms and explain how it worked.

Once you get to the dealer, you should do your best to be in control. First agree on the price of the car. Never focus on the monthly payment as part of the negotiation unless you want to get screwed.

Next, you can ask about dealer financing if they have incentive offers going and you want to consider that route. Have backup financing ready, though, just in case you magically don’t qualify for that awesome rate.

The dealer will run your credit and come back with some numbers. If you agree, you’ll go to the financing office and sign the papers. If you don’t agree, tell them you have your own financing.

Some banks already have arrangements with certain dealers that streamline the process. If your bank and dealer don’t have a deal, the bank will provide you with instructions. You’ll still have to go to the finance office to sign papers. This is also where they’ll try to sell you more stuff.

When my husband bought his car, he paid cash for the whole thing. The dealer still tried to convince him to finance, with a rate of 9.9%!

If you want to check out loan rates, start at Bankrate.com or Edmunds.com for lists of local rates.

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