Guide to Financing an Auto PurchaseReviewAdviceCalculator

Guide to Financing an Auto Purchase

Don't fall for those late-night car loan commercials with unrealistically low rates that say that you can walk out of a dealership, keys in hand, if you call the number on the screen or sign up on the company's website within the next 24 hours.

Financing an auto purchase is not a convoluted process, but it certainly is not easy as those adverts portray it. To buy an automobile on credit, follow specific measures and assess your financial situation. You also need to avoid things like leasing and funding through an automobile dealer, to shop for the best auto loan, and to determine how much money you need to complete the transaction.

Guide to Financing an Auto Purchase

Assess Your Financial Condition

Evaluate your economic condition before even thinking about purchasing an automobile – let alone getting a loan to pay for it. A good friend of mine, who has bought and sold many cars in his 25-year career as an independent car dealer, says you should pay attention to three things when assessing your financial condition:

Your resources – These relate to things like cash in your checking and savings accounts along with certificates of deposit and money market accounts. Other assets – same thing as resources – include investments in corporate stocks, bonds and property, say, a second vacation home generating rental income on the side. Include also in your resources your mortgage-free house and lien-free equipment and other items, such as cars and lawn mower. Anything that could fetch a few dollars on eBay or in a real-life marketplace also qualifies as a resource.

Your debts – A prospective creditor would want to know how much you currently owe before the lender advances you new funds. From the creditor's perspective, a new loan means higher risk, especially if your current debt load seems unbearable when compared with your income. Questions of income and debt are important in the auto financing process, which is why most lenders use your debt-to-income ratio to evaluate your application and eventually approve or decline it. (To calculate your debt-to-income ratio, divide your debt payments divided by your net income. The lower the ratio, the better.)

Extra costs that come with car ownership – Your liabilities – another name for debts – certainly would go up when you buy a car, be it a new automobile or a second-hand vehicle. As a car owner, you would spend more on maintenance and repairs as well as a collection of other costs that industry insiders call TOC – shorthand for "true cost to own" or "total cost of ownership." TOC includes things like insurance, state fees and depreciation along with finance charges and fuel.

Loan or Lease?

Leasing is not a bad thing per se, and many smart people lease, but my only beef with leasing is that you make payments that don't add up to anything – unlike an auto loan that you gradually pay down, and once the principal balance is zero, the vehicle is yours. I guess it is a matter of personal preference when it comes to car lease vs. car purchase. In essence, an automobile lease is an extended vehicle rental, and the lease-vs.-purchase dilemma is the same you would face when you think about buying a house or renting an apartment – in other words, and roughly speaking, to whom you want to send your monthly payments: a mortgage lender or a landlord. Shop for the Best Auto Loan

For psychologists, anthropologists and other social commentators, the word "herding" often means taking comfort in following the crowd. What they call "herding," I call "hearing," paying attention, listening to folks, following the collective wisdom – and this is what I recommend you do when shopping for a car loan. Visit financial sites and loan calculator portals, talk to your bank or credit union, and inquire within the family – who knows, maybe Grandpa Sheldon or Aunt Mae can help you buy that car you so want. Things to keep an eye on include:

  • Loan amount
  • Annual percentage rate
  • Loan term
  • Terms and conditions
  • Estimated monthly payments

You also can use AOL's auto loan comparison tool to determine which car loan is better.

Negotiate, Negotiate, Negotiate

When shopping for an auto, don't put too much emphasis on avoiding bad deals and so limiting opportunities worth exploring, says my car dealer friend. Put simply, be flexible and open to any type of opportunity, whether online or in real life. But I would add that, whatever deal you come across, you should try to negotiate with the seller. The keywords here are "negotiate," "negotiate" and "negotiate" – because the loan amount you ultimately would apply for depends on the car's final price. Besides bargaining skills, you need the perfect timing to strike a good deal and get, for example, that sedan you so relish at half-price or marked down by 25%. To save money, industry insiders recommend that you shop early in the week, at the end of the month, or when an automobile or specific make is about to be replaced or removed from the dealer's lot.


When searching for the best auto loan, don't leave any stone unturned. Delve into all resources, online and in real life, and ask the right questions. Places to look – and people to talk to – include online car loan review sites, your banker or credit union representative and the dealer. Asking others intelligent questions is the desirable thing to do, but don't forget to ponder personal things like financial condition and credit score before applying for an auto loan.

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