Four Questions to Ask in Financing a Vehicle

When it's time to buy a vehicle, one of the big issues to deal with is how to handle financing. Here are four key questions that you can use to help put yourself in the best buying position.  

1. What's the right amount of cash to pay upfront?

Buyers with substantial savings sometimes decide to pay cash for their vehicles to avoid car payments or interest. But kicking out $30,000 or more may not be the best idea. If paying cash leaves your emergency fund depleted and something bad happens, you may have to borrow money at much less favorable terms. Many buyers need a loan just to afford a car. But financing the entire purchase also may be unwise.

Taxes and fees add to the sticker price, so with no down payment, you'll owe more than the car is worth as soon as you drive off the lot. And depreciation could leave you further "upside-down" on your loan. If you need to sell the car or if it's totaled in an accident, you'll get less money than you need to pay off the loan and may have to pay thousands of dollars out of pocket.

Many financial experts suggest making a down payment of 15 to 20 percent of the purchase price.

2. What's the best place to get a loan?

The dealership is one place to secure vehicle financing, but experts say it's good to shop around.

It's possible that you'll get lower interest rates at your credit union or other lending organizations where you're a member and they might be more likely to work with you on the terms. 

It can also be helpful to get preapproved for an auto loan before you're ready to buy. With a loan lined up, you can focus on negotiating the price and not fall prey to slippery sales tactics. If the dealership offers you a better financing deal, that's even better. Make sure you look for application fees, other miscellaneous fees and your loan term so you are making an apples-to-apples comparison between loans.

Be on the lookout for offers to lower your interest rate through a lender, vehicle manufacturer or dealership. 

3. What length of time should the loan be for?

The longer the loan period, the smaller the monthly payments will be. That tempts many car buyers to finance their cars over five, six or even seven years. But that's not always the best choice, experts say. 

Choosing a vehicle that you can pay off in three to five years is preferable, they say. 

Longer term loans are risky for two reasons. First, stretching out your payments means you'll pay more interest and typically, a longer loan term comes with a higher interest rate. Second, since new vehicles typically depreciate quickly, a longer loan increases your likelihood of being upside-down. It's not a good idea to finance a vehicle for longer than you plan to own it. 

4. What incentive should I look for?

Many dealers will offer either low-rate financing or a hefty cash rebate on a new vehicle. Which is better?

Basically, choose the one that will most lower your payments.

Use this auto loan payment calculator to guide your decision. And if you can take the dealer's rebate and find a low-rate loan from a third-party lender, it might be possible to have your cake and eat it, too.

-With contributions from USAA