Chapter 3: Credit And Financing
 Your credit history will have a serious impact on the interest rate you will be offered. The better your credit score, the better rate you will be eligible for. Other factors, such as length of employment, income and expenses may also be considered when determining what type of financing you may qualify for.
If your credit report isn’t perfect, you may consider having someone with good credit cosign the loan for you. Be cautious about using this option though, as the cosigner assumes equal responsibility for the repayment of the loan. Any late or missed payments will appear on each of your credit reports.
Some financial institutions may offer special loans for first time buyers. These may enable you to get a loan at a reasonable rate even if you have a limited credit history.
Financing Options and Implications
Because financing increases the total cost of the car, the loan you get is very important. Make sure you understand the following aspects of the loan agreement before you sign any documents:
- Exact price you’re paying for the vehicle
- Amount you’re financing
- Finance charge
- Annual percentage rate (APR)
- Number and amount of payments
- Total sales price
Shop for the Best Deal
The total amount you will pay for your car depends on its price, the annual percentage rate (APR), and the length of the loan. When shopping for the best deal:
- Don’t be fooled by an advertised low monthly payment – if the length of the loan is long and the interest rate high, you will be paying more than you may have to.
- Be wary of extremely low promotional APRs. Though you may qualify for particularly low rates by making a large down payment, it may be more affordable to pay higher financing charges on a car that is lower in price or to buy a car that requires a smaller down payment.
- Look for manufacturer’s incentives. Dealers may offer cash back on specific models.
Beware Zero Percent Financing
Zero percent financing sounds like an amazing bargain – after all, how can you beat a no interest loan? Often, you can. Such “deals” frequently come with inflated prices for extended warranties and loan insurance, high application fees, and pre-payment penalties. And because you forfeit the rebate option, you end up paying a higher price for the car. You may also be required to repay the car in three years or fewer – resulting in a very high monthly payment.
Consider the example:
| Price |
$20,000 |
$20,000 |
| Down Payment |
– $2,000 |
– $2,000 |
| Manufacturer Rebate |
– $2,000 |
– $0 |
| Amount to Finance |
= $16,000 |
= $18,000 |
| Interest |
5% interest |
dealer 0% loan |
| Loan Period |
60 months |
36 months |
| Monthly Payment |
$301 |
$500 |
| Total Cost |
$18,060 |
$18,000 |
While the zero percent interest offer seems to make sense, giving up the rebate and having a short-term loan can make for pretty steep monthly payments. And in the long term, it only cost $60 more to take the five percent loan over five years, with the much more reasonable payments.
Zero percent financing can be elusive. It is only offered to those with very good credit, which is determined by the lender. And it is often not available for the most popular cars and trucks.
Dealer and Finance Company Loans
At an auto dealership, you will be encouraged to use dealer financing. While not all dealer loans are bad, in most cases, a loan from your financial institution will be preferable. This example shows the difference between a loan at five percent interest (a good rate), and one at 15 percent (a rate often offered by finance companies).
| Amount Financed |
$16,000 |
$16,000 |
| Interest |
5% interest |
15% interest |
| Loan Period |
60 months |
60 months |
| Monthly Payment |
$301 |
$381 |
| Total Cost |
$18,060 |
$22,838 |
The higher interest rate increases the loan payment by $79 per month, resulting in an increased total cost of nearly $4800. |
