Car Loan Guide with Auto Loan Calculator

Written by
Kirk Haverkamp
Read Time: 12 minutes

Choosing a lender to pay for your car may not be the most exciting part of car buying, but it is certainly one of the most important. You may be making payments on your car for anywhere from one to seven years. That can add up to a lot of wasted money if you do not get the best deal possible. The only way to make sure that you are getting the best deal possible is to shop around.

Read this guide on how you should research and proceed in order to finance your new car that you are planning to buy, whether it is a used one or a brand new car.

A New Set of Wheels

If you've decided that it's time to buy a car, you probably can't wait to head to the dealership to start your test drive. But before you even think about makes and models, there are other things to first consider. They're not nearly as much fun as that test-drive, but they'll help you make better car-buying decisions.

Begin the buying process by looking at your finances. You'll automatically narrow your choices when you figure out how much money you can realistically spend.

The budget

No one likes to make a budget, but it could be the most useful thing you do when it comes to purchasing a new automobile. Think about it this way If you have no idea how much you can spend, you may wind up buying something you can't afford. If you don't have the money to make your payments, your car could wind up being repossessed, leaving you with no car and loads of debt.

To avoid that scenario, use conservative figures to determine how much you can set aside for a car payment. Naturally, you're going to have the purchase price. If you have a down payment, either from the sale of a current car, trade-in, or savings, factor that into the equation.

Every car needs insurance, and you'll also have maintenance and repair expenditures. Your insurance agent can quote you some rates, and check with Consumer Reports and other online resources for repair histories on different cars.

Give yourself plenty of wiggle-room in your monthly budget. Most importantly, be sure you don't sacrifice savings for retirement or the kids' college educations just to get a nicer car. It might be short-term fun, but it could spell long-term disaster.

Financing Where will you turn?

Financing plays a key role in motivating the seller. If you're buying through a dealer, be aware that many used car salesman make their money on the "back end" of the deal. This means that they'll be willing to take a small profit off the price of the car in the hopes that they can make money on the financing end of the deal. Before you agree to any financing packaging, compare the specifics of each dealer's offer with the rest of the market.

When you buy through a private party, the seller wants to choose the buyer who'll close the transaction soonest. If you're pre-qualified for a loan before you enter into the negotiating process, you're at an advantage. If you're in competition with another buyer, you may be able to tip the odds in your favor.

Research your financing up-front

Before you even start researching used cars, take care of the financing. Begin by reviewing your credit score. Lenders consider your score when determining your interest rate and repayment terms. If your credit report has errors that are lowering your score, it could negatively influence the quality of your loan. You'll want this cleared up before you begin shopping for lenders.

After your credit report is in tip-top shape, start shopping for finance options. Search the Internet, visit with local lenders, and ask your friends for referrals. Compare lenders' rates, repayment plans, and overall customer service. When you've chosen a good lender, get pre-qualified for a loan. It will give you added leverage with private buyers, and provide you with a comparison when you consider a lender's program.

People buying a used car can't resist the urge to start kicking tires. But it's the wise shopper who kicks a few lending institutions first. Get your financing ducks in a row before you start shopping. It's the best way to ensure that you retain the value that comes from buying a used car.

3 financing options for your car

Once you've found a monthly car payment amount that you're comfortable with, set your sights on financing. If you don't have the cash on-hand to buy outright, consider these options

1. Home equity. Since homes and cars are usually the largest single purchase most people make, it's not surprising that some smart consumers use one to acquire the other by taking out a second mortgage to buy a car. Because the interest on a home loan is generally tax-deductible, many use either a fixed-rate home equity loan, or a home equity line of credit (HELOC) to finance their wheels. A bank or a credit union can provide you with the loan, assuming you have enough equity in your home.

2. Bank loan. Another popular choice is a standard car loan. Credit unions tend to have the best rates, but banks can be equally competitive. Don't limit yourself to local lenders, however. Drive down the information superhighway; the Internet is a great vehicle for finding good deals.

3. Car dealer financing. Opt for this choice only if you have problems getting a home equity or bank loan. Financing through a dealership will generally involve higher rates and more fees.

Borrow from reputable lending institutions at competitive rates. If you don't qualify because of a tainted credit past, consider rewriting history and wait on that new car until you've got your finances back in shape.

Next to a home mortgage, a car is one the biggest purchases you can make. Take your time and shop various lenders before you make a decision. Understand the fees and the interest rate you'll be paying. Haste will make waste of your bank account if you're not careful. Be comfortable with your financing before you sign on the dotted line.

Four Questions to Ask When Financing a Car

Car-shoppers spend a lot of mental energy preparing for the salesperson. They plan their negotiation tactics as they ready themselves for a war of the wits. They should also prepare for another key player in the car-buying process-the finance manager.

"Buyer beware" is a good phrase to keep in mind when you're searching for a new car. Everyone has heard the stories about car salesmen who'll do and say anything to move their four-wheeled merchandise. But there's someone else who can also have a profound impact on your purchase-the finance manager. Here are a few questions to ask when the two of you talk dollars and cents:

1. What's the interest rate on the loan?

The most important factor in any financing deal is the interest rate. Ask the dealer for the APR (annual percentage rate), which is the best apples-to-apples measurement for comparing loans. Be sure to ask him how they compute their APR, because many lending institutions use different methodologies. You'll get a sense of exactly what a lender is including in the interest costs.

2. Can you detail all the penalties and fees?

A favorite tactic of any lender-auto, mortgage or personal loan-is to bury an assortment of fees and penalties in the fine print of your car loan. Make certain you're clear on all the fees that are included. The dealer may also include penalties for paying off the loan early. Try to avoid them if at all possible; they can be problematic if you decide to refinance the loan down the road.

3. Can you get final approval on the financing package before you leave the lot?

Finance managers love to tell you that the deal is approved, but then call you the next morning to say the financing has fallen through. Naturally, they'll have another lender lined up for you, although the interest rate will be higher and there'll be more fees attached. Don't fall for this one. Make sure that the deal is set in stone before you leave the lot. If it's not, tell the finance manager you won't come back.

4. What are the specifics behind the credit insurance?

Including some sort of credit disability or credit life insurance policy with the loan is another revenue-generator for auto dealers. If you feel that you need one of these policies, ask for all the details concerning the coverage. Compare the policy with others on the market, and also check with your financial advisor to see if it's the right deal for you."Buyer beware" is good advice when dealing with a finance manager; but the above questions will do more than help you get your guard up. Armed with them, you'll be "buyer prepared." You'll send a clear message to the finance manager that you're nobody's financial fool.

Used or New?

By using your finances to guide your buying decision, you're almost at the point where you can go out and kick some tires. But there are a couple of other questions to answer before turning the ignition key for your test drive. One of the most important or used?

Typically, people who buy new are less concerned with price. Cars depreciate the moment you drive them off the lot, although many higher-end imports and luxury cars tend to hold their values for a longer period of time than their domestic and mid-priced counterparts. But if you like the latest in convenience and on-board technologies, a new car might be the right option for you.

The financial advantages to buying used are plentiful. You'll have a lower purchase price, depreciation rate, and insurance premium. On the flip side, you're more likely to face higher maintenance costs, as warranties begin to expire and parts start to wear out.

A new entry to the automotive world-the hybrid car-is beginning to make its way onto the used car lot. However, the price break between new and used isn't quite so dramatic. In terms of gas savings, some argue that the amount of cash you'll save at the pump offsets the increased price of a hybrid. However, you would definitely be doing your part for the planet by limiting damaging emissions.

There are plenty of arguments on both sides of the fence when it comes to new vs. used. To help you with your decision-making process, list the top five things you want in a car. These should reflect your tastes and can help bring an end the age-old battle.

Buy or Lease?

Deciding whether to lease or buy comes down to crunching numbers. Generally, a lease requires little or no money upfront, and requires lower monthly payments. The downside is that when it expires, you're stranded on the side of the road without a car.

If you buy, you may pay a little more per month; but when your loan is finished, you're left with a familiar set of wheels-one that you can resell when you're ready.

This decision also involves convenience. With a lease, you get the pleasure of driving a new car every few years, one that will not require heavy maintenance costs on your part. The monthly payment for a car will also be lower if you lease a vehicle rather than purchase it.

However, owning allows for more flexibility. You're not constrained by the mileage limits of a lease, and you can sell it whenever you'd like.

At this point, you've mulled over some pretty important questions, crunched some numbers, and come up with concrete answers. Like the question "new vs. used," "lease vs. buy" is a personal decision. To find your answer, carefully evaluate your short and long-term needs, and factor in your personality. Above all else, your decision should feel as comfortable as Corinthian leather. Take your time and you'll make the right call.

Choosing a car

Hooray! You've got your finances set, and you've made some decisions how to finance, new or used, and buy or lease. If you think that you're ready to head to the showroom to sample the latest and greatest four-wheeled wonders, think again. Put the brakes on that notion-there are a few more things to do to make your shopping experience more efficient and effective.

1. Research, research, research!

Now that you know how much you can spend, you should also know what car will suit you best. It's time to do some heavy-duty research, and there are plenty of resources for you to tap. A simple web search will turn up reviews and objective car ratings. Two good sites are and The Kelley Blue Book, a long-standing benchmark for shoppers, features prices for all makes and models at its website.

If you prefer the printed page, Consumer Reports and Car and Driver are great resources for comparison-shopping. (Both magazines have complementary and Don't be shy about checking out an auto manufacturer's website. They'll have plenty of in-depth information on each car, including intangibles such as colors and options.

Doing upfront research on a car-especially used models-will give you added insight into how the car really performs. A little background about the vehicle will help you learn exactly what you're getting into.

2. The price is right

Now that you've put the Internet to work for you in picking out a make and model, use it to find the right price. A variety of sites will enable you to purchase a car right over the Internet. Many local dealers now list their prices in cyberspace. Use these to comparison shop. It will give you a good idea of what the market is offering.

Researching a price over the Internet doesn't mean you need to buy a car online. If you feel more comfortable visiting a showroom, use web pricing as a negotiating tool. It sends a clear signal to a salesman that you know your stuff, and will probably get you a better price right off the bat. Green light means "go shopping!"

Congratulations. You've done quite a bit of upfront work. By determining your price range and researching some of the top car choices, you can save yourself hours otherwise spent strolling through parking lots. You've also determined which cars would be a good value, and which should be avoided. The light is green-it's time to buy a car.

Enjoy the ride!

Follow us on Twitter and Facebook.

Recent Articles

Wave of Home Equity Defaults Coming?

A new mortgage crisis, this one in home equity loans, could be brewing as…
Aaron crowe
Written by
Aaron Crowe
Read More

How Refinancing Can Hurt Insurance Rates

A mortgage refinance may have some negative consequences that you never…
Written by
Kara Johnson
Read More

How can I get preapproved for a home loan?

Getting preapproved for a home loan is an important part of buying a home.…
Written by
Kirk Haverkamp
Read More

What's Different About Getting a Condo Mortgage?

Buying a condominium is often the choice of people who value convenience.…
Written by
David Mully
Read More