Step 4: Financing a car purchase

Pay in cash
If you have a great deal of money saved, you might want to go ahead and pay for your car in cash. By paying in cash, you avoid the added cost of financing charges associated with getting a loan, which can save you thousands of dollars over the life of your car. If you do pay cash from money you have saved, be sure you don’t completely wipe out your savings. Keep enough in savings in case of an emergency, and be diligent about replenishing the money. That way your next car can be paid for in full too!

Home equity loan
One way to lower your interest costs when buying a new car is to use a home equity loan or line of credit. A home equity loan may have a lower interest rate than a car loan, since it is secured by the equity in your home. In addition, the interest you pay on a home equity loan is generally tax deductible, which means you save even more (check with a financial advisor about your particular situation). And with a home equity, you don’t have to worry about having a down payment saved.

Remember though, that you’re home is at risk if you can’t make your payments. With a car loan, all you lose by not paying is your car. With a home equity loan, if you default, you can be forced to sell your home. So make sure you can easily afford your monthly payments.

Car loan
If you don’t own a home, or if you don’t have enough equity in your home to borrow against, you’ll need a car loan. Financing through a dealer is convenient, but it can also be more expensive, because it’s another way for a dealer to make money from selling you your car. Also make sure the dealer’s loan terms aren’t set up to match your monthly payment. If the dealer knows what you can afford each month, he can structure a loan that meets that payment but still ends up costing you more than independent financing.

Calculate your monthly auto payment


Before you go with your dealer’s financing, shop around to make sure you’re getting the best rate. LendingTree has a network of auto lenders that compete for your business. You fill out one form and get back up to four offers in minutes, making it easy for you to compare terms among lenders.

Step 3:     Should you lease or buy a car?

Next step: Negotiating the car price


Compare Auto Loans in minutes.