So you've decided to buy a new car: Congratulations! You've clearly worked through the numbers, decided that buying new makes more sense for you than leasing or buying used, found the car of your dreams, and arm-twisted the local dealers until you got a great price -- and a good offer for your trade-in. Good job!
Now comes the hard part: How are you going to pay for it?
Buy, beg, or borrow
No, I don't mean "where are you going to come up with the money?" I assume that you've already figured out what you can afford and are shopping within that budget. What I mean is, how are you going to finance that purchase? If you've got the cash in the bank to pay for that shiny new ride, more power to you. But if not, you'll need a loan. And despite the widely publicized subprime credit crunch, if you have a pulse (and maybe even if you don't), you'll have plenty of financing options available to you -- for a price.
In fact, your friendly and ever-so-slightly-slick car salesman -- and his dealership's less-friendly and probably not-so-slick finance and insurance manager -- are probably champing at the bit to offer you a great loan with easy terms. (Or at least what they say is a great loan.) While they're probably used to customers signing on the dotted line without exploring other options, it's worth defying expectations and sales pressure.
The other options
Believe it or not, sometimes the dealer's deal turns out to be the best one. Nearly all car manufacturers, following a trail blazed by General Motors (NYSE: GM ) decades ago, have set up financial services units to provide loans to car buyers, and their terms are often unbeatable, especially on slow-selling models.
While incentives to spark sales of slow-selling or end-of-year vehicles most often take the form of "cash back" discounts, there's frequently a very-low-interest financing option that can be selected instead. Occasionally, you can get both.
For example, when my wife and I bought a minivan a few years back, we were offered a loan from DaimlerChrysler's (NYSE: DCX ) financing arm that had a 0.9% interest rate, well below market. There was nothing tricky about it (and we looked at it up, down, and sideways to make sure, believe me) -- it was just a great loan, one we ended up taking.
Making the right decision
If you have an either/or option -- discount or low-cost loan -- run the numbers both ways. Sometimes, taking the money and getting good financing elsewhere turns out to be the right choice.
No matter what, unless the dealer's offer is obviously unbeatable (terms like "0% interest" are often a clue that they're desperate to move the metal), don't sign right away. It's just one more pitch to push you harder to close a sale.
Beware the "great terms" that aren't
If the car you're buying is a hot seller, or if your credit is less than perfect, you probably won't see one of those 0% deals. You might be offered a market-rate loan from the automaker's finance arm. On the other hand, the dealer might recommend an above-market-rate loan from some financing company you've never heard of, accompanied by an explanation of terms deliberately written to be as abstruse as possible. (I'm not joking. If it seems impossible to understand, it was designed that way. Beware.) Odds are good that the financing company has a sweetheart deal with the dealership, and those loans are a way for the dealer to make extra money off the clueless.
And if that's the case, it's time to push back on the dealer. Tell him he needs to up his game -- and consider what you can get elsewhere. In Part 2, we'll look at the pros and cons of other sources of financing, and help you figure out which is the most cost-effective way to bring home your shiny new car.
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