Your Gearhead Guide to Vehicle Financing

Once you have regained your sanity, decided upon what vehicle to buy, and you have worked out a fair deal (or not in case of an E30 M3), it is time to secure the funds for purchase. Financing isn't rocket science, but it is nice to have a handy guide to your options. I realize most of you know these tips but this post was done by request because of people who wanted to learn more about auto-financing.

So here we go-

Hopefully you have already figured out what you can afford. If you are a cash buyer this is easy, for example, if you have 15 grand to spend on a car, so you cannot spend more than 15 grand.

If you are financing things get a little more complicated. I can't tell you how many times customers tell me they are in the market for a 30k car for around 350/mo (without a significant down-payment). Hey look I'm an English major so this math shouldn't be too hard.

Luckily there are many handy-dandy online calculators (like this one) to help you figure out what you can afford. While it is not recommended you get into the "monthly payment" game with a dealership, you should know what your monthly budget allows for. Then you can work backwards a bit and get a ball-park for your spending limit. Do keep in mind the length of a loan; the shorter the term the higher the payments and the inverse is true for longer loans. Most people finance between 36-60 months. You can get longer loans but normally not advised. Again it comes down to what you have available for down payment, what you are comfortable with. If you come to find out that your monthly budget doesn't allow the car you really want, perhaps leasing might be an option for you.

Be sure to keep in mind those "extra" charges like sales tax, title and tag fees. These vary from state to state so do a little research before heading to the dealership. Sometimes even within a state the sales tax can change, here in NJ we have a 7% sales tax but if you purchase a car in a "low income" area you could pay as little as 3.5%. On a 20k car thats the difference between paying $1400 in tax or $700. Of course, "extra" charges like pinstriping, VIN etching, and Scotchguard etc...that usually come in the form of "Executive Packages" are bullshit and should be removed.

Getting the money-

Most people get financing through a dealership which usually is getting their money through a manufacturer aligned bank like BMW financial or something. If the manufacturer is offering low interest rates as an incentive to sell a car this is the way to go. Of course these killer rates are all dependent upon your credit score...you do know your credit score right?

Suppose your credit score is not that hot for whatever reason and you don't qualify for that 0% financing. Not to worry, you don't have to be at the mercy of whatever the dealer offers you. Your local bank, your credit card, and credit unions most likely will have car-loan offers, give them a call and see what you can get pre-approved for. Speaking of credit unions, if you are current or former military there are numerous credit unions designed to get you reasonable loans.

The key is to shop around before arriving at the dealership. Shopping for several loans will not have a drastic impact your credit score as long as you do your applications within the same period of time. The reason to do this is two fold, first you know you have a loan lined up so the dealership can't play games like forcing you to take their high-interest financing. Here is a little trick some of them play, they will have you approved for one rate say 3.5% and tell you you are approved for another like 5%. If you accept the 5% they get the rest, and it's totally legal. So by having a pre-approval this incentives the dealerships to get you the lowest rate possible from their banks.

How much is a good down-payment?

Again it all depends but the more you put down the lower your payments will be. Some people put just enough down to cover the tax and tags fees listed above, because it is silly to pay interest on that stuff other people drop a healthy sum so they keep their car in budget and not have to worry about being upside-down (when you owe more than your car is worth).

Is there an advantage when buying with cash?

It really depends on the transaction, private sellers and small dealerships, that are selling relatively inexpensive cars, normally would prefer cash or a bank check. However, if you are going to drop 40k in bills (or a check) on a Mercedes it normally doesn't do much for you. Many dealerships get a little kick-back from the banks for the loan also if you are paying in real dollars there is more paperwork involved for transactions over 10 grand this can add a level hassle for the dealership. More often than not they prefer you get the loan. Should you tell your salesperson you are a cash buyer? Maybe. I suggest working out the deal first and being open to the loan of the rates are good enough. If not then throw down the money and drive away. Most of the dealerships I work with will give you the best price regardless if you are a cash or a loan buyer, but some places will only give you their lowest price contingent upon using their banks.

This was my attempt at covering the basics, if you have any more tips please leave them below. Thanks for reading!

My name is Tom and I run Automatch Consulting. I am a professional car-buying consultant, which means people pay me to help them select the right car (NO YOU CAN'T HAVE A PRIUS) and negotiate with the dealerships to get them the best price. If you have any other questions or suggestions for future posts about the car-buying process please let me know. You can find some of my other posts on car-buying here.