There are many varieties of auto financing to choose from.
- Dealer financing – You buy and finance the car all at once through a car dealership. Occasionally, dealers offer special rates to get rid of overstock in their inventory, especially at the end of a car model year.
- Banks – You can usually get a lower interest rate at a bank than at a dealership, especially if you are an existing bank customer. Many banks require a 10–20 percent down payment to cover the depreciation of the car in case you default on your loan and they need to repossess your car.
- Credit unions – Credit unions may have lower overhead costs than banks, allowing them to offer lower auto loan rates.
- The internet – Shop for car loans online to get quick approval and easily compare prices.
- Trade-in – If you already own a car, then you can trade it in for a discount on a new vehicle. If your old car is in good condition with relatively low mileage, you may be able to use it toward a down payment.
When you're financing your new car, it's important to know how pre-approved financing and negative equity will impact costs.
Many lenders will pre-approve a certain loan amount based on your income and credit history. With a pre-approved loan, you'll know exactly how much you can afford to spend on your car.
As soon as you drive a new car off the dealership lot, it instantly becomes a used car and its value continues to decrease. While the value of your car drops immediately and will continue to depreciate over time, what you owe on your loan drops more gradually. If you owe more money for your car than what you can sell it for, then you have negative equity.
You can avoid losing money from your negative equity by following these simple tips:
- Buy a car that you can afford. If your auto loan payments are too high, you may decide to sell the car before it's been paid off completely.
- Keep your car until it is paid off completely.
- Pay off your loan sooner by choosing a shorter loan or overpaying the monthly amount, if allowed.
- Make the largest down payment you can. This will help offset the effect of depreciation and start giving you some positive equity.