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Financing a Car

Produced by Based on an article by the National Consumer Law Center
Reviewed December 2019

Financing Your Car

Watch this video from the Federal Trade Commission.

Getting a good car loan for a used car takes work.

You may be most concerned about what you can pay each month, but how much you pay for your car overall is very important too.  Even if a dealer can promise you a lower monthly number, you may be paying way more than you should for the car.

The amount you pay depends on

  • Your itnerest rate,
  • How long your loan is,
  • How much money you put down,
  • The fees and costs charged, and
  • the initial price.

You want these numbers to be as small as possible.  There are other hidden costs with financing too.  The longer your loan is, the longer you have to buy full-coverage car insurance.  Once your loan is gone you may be able to buy a cheaper policy. 

To compare your options, write out a list showing the amount of money you will pay up front and your total cost for each option over time.  Also list the estimated value of your property at the end.  You can use an amortization calculator to find out how must you will pay over time in interest. The Consumer Financial Protection Bureau also has a Auto Loan Toolkit to help you compare auto loans.

For example:

  Lease Car Loan from Bank Car Loan from Dealer
Value of Car $9,000 $9,000 $9,000
Down Payment $250 $1,000 $0
Interest Rate   4.25% 4.25%
Fees $500 $300 $500
Year 1 $450 $1,776 $1,488
Year 2 $450 $1,776 $1,488
Year 3 $450 $1,776 $1,488
Year 4 no car $1,776 $1,488
Year 5 no car $1,776 $1,488
Year 6 no car    $1,488
Year 7 no car   $1,488
Total Paid $2,100 $10,180 $10,916
What I own 7 years later $0 $4,000 car $4,000 car

Car dealers often offer a low teaser rate, but it may be conditioned on not getting a cash discount.  This would mean that the actual cost of the car is more. 

Go to your bank or credit union and ask if they offer car loans.  They may make you a better deal.  Also, bankers and credit unions often do not charge early payment penalties. You can negotiate with the dealer with the quote you get from the bank and may be able to get a better deal.  You also have the option to lease a car

Learn more from the FTC about Financing a car.

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