Second only to a house, a car is likely to be the most expensive purchase you will make.
One of the best times to arrange financing for a car is before you go car shopping. While you won’t know the exact amount you will need, you can call savings and loans and banks to find out what their interest rates are. Then you can go to the savings and loan or bank to pre-arrange the financing before you go to a dealership.
One of the worst times to arrange financing is at the dealership when you are buying the car. At this point, the process is often made intentionally confusing. It is often hard to know the true price of the car and interest rate.
Three factors will determine how much you pay each month when you borrow to buy a car:
- The amount borrowed (price plus fees and taxes but minus trade-in and down payment)
- The APR (Annual Percentage Rate) of the loan
- The length of the loan (number of months)
Once these three factors are set, the monthly payment is set. There is no wiggle room.
To learn more, click here. Go to “Buying and Borrowing.”
Why are zero-interest loans not interest free?
When a car dealer offers a zero-interest deal, there is almost always an option to get a discount for paying cash. That discount is the same as the interest. For instance suppose you could get a zero-interest loan for two years on a $20,000 purchase (including taxes and fees). The monthly payment would be $833. If there were a cash discount of 10 percent, then the price would drop to $18,000. Getting an $18,000 loan from a bank with a 9 percent APR would have a monthly payment of only $822 for two years.
Which is cheaper, $833 or $822? Zero interest often costs more!