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5 things to know before financing your car

By Robert Elsenpeter, Contributing writer
Published On: Jan 15 2012 09:51:19 PM CST
Updated On: Jan 21 2013 01:00:00 AM CST
car financing money cash

iStock/hjalmeida

Henry Ford had a vision of making a car that everyone could afford. He automated the process of building cars, and soon what was once something only the rich could buy was parked in garages all around America. Now everyone has their own ride, and plenty of us have car payments to go along with those cars.

Some of us do a better job than others when it comes to getting a car loan, and there's plenty to consider when financing a car, especially in this cruddy economy. A little forethought when financing a car can save you thousands of dollars and a lot of stress.

Here are some good things to be aware of when you try to finance your new dream machine -- they are some things that can keep you out of trouble now and in the future.

car for sale with zero percent financing

No. 5: Zero percent financing

Obviously, the lower an interest rate the better. And zero percent financing is about as good as it can get, but there's more to the story.
First, the car model that you want to buy may not be covered under the zero percent interest rate, so they'll try to steer you toward a model you don't really want. Also, you have a shorter time to pay. Dealerships love it when people pay a huge interest rate and stretch it out over six years.

Conversely, if you do qualify for the zero percent rate, they don't want you hanging around for half a decade -- at best you might only get 36 or 48 months.

Finally, look for the sticker price to be bloated and non-negotiable. They're not making much money off this sale, so they aren't likely to take much off if you try to haggle.

cars and trucks for sale at dealership lot

No. 4: HELOCs

Especially in this economy, we should already be wary of home equity lines of credit (HELOCs).

These are the things you can use to get a loan to pay off your car, but you use your home as collateral. That is, if you can't make your payments, the good news is you get to keep your car, but the bad news is since you are securing the loan with your home, you lose your house.

Making the concept even more frightening is the fact that usually HELOC interest rates are variable. So while the payment might be reasonable now, a couple bumps to the rate can lead to disaster.

Sure, there are advantages -- like being able to write your car loan off your taxes, for instance. But the whole thing can go south on you pretty quickly.

car shopping online computer keyboard

No. 3: Beware of online brokers

There are tons of loan options out there, but how do you know the best one? You can do all the research on your own, but that's all you'd wind up doing if you tried to do it yourself.

At least that's the selling point of online brokers. They act as middlemen between the buyer and lender, to get you financed right away. But "right away" is not the same as "with the best deal."

One of the dangers is that even though you give the broker all your information, they aren't able to come up with the answers the ideal lender needs, and quite possibly you can be rejected.

You'd probably be better off looking around yourself than rely on an online broker. The broker's job is to get you approved -- not to get you the best deal. As such, you might get approved, but with less than favorable terms.

bank credit card application

No. 2: Think about financing first

On the previous page, we talked about the dangers of using an online broker. It's a better idea to do the legwork yourself.

There are all sorts of places you can look to get a car loan. Don't just go with the dealership. Although convenient, they might not offer the best rates. Banks and credit unions usually offer better rates, but they're not always open at nights and on the weekends.

Some insurance companies even offer financing plans. The benefit here is not only competitive interest rates, but also provide built-in Guaranteed Auto Protection (GAP) insurance. GAP insurance is something you should have on a newer car in case it gets totaled and the amount insurance pays does not cover the amount remaining on the loan.

Shopping around can save you thousands on the life of the loan. Don't just go with the dealer's financing plan.

car financing loan application form

No. 1: Details matter

You know when you go in for a car loan and they shove the stack of papers under your nose and you just sign on the line, grab the keys, and go on your merry way? Yeah.

Don't do that. Not that any lender would be willingly shady, but a detail you may think exists in fact may not.

Know all the details of your deal. For instance, what's your interest rate? Can you afford it? Is there a fee for prepayment? What's the grace period for payments? How will you get the title when the car is paid off?

Think also about warranties. What will the warranty cover? Is there something that would destroy you, financially, if it broke and your warranty doesn't cover? If so, you might want to renegotiate the terms of the warranty or start saving up for a rainy day.

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