Financing Your Automobile

Paying cash for a new car sounds absurd to many people, but

if you are diligent about building your investment portfolio, you can save up the money in a "new car account" just as you would for a down payment on a new house. It may mean keeping your current vehicle a few years longer, but it is possible. If nothing else, you should be able to save up for a 15 percent down payment on a new car.

The first step in financing a new car is knowing where you stand from a credit perspective. Get a copy of your credit report from Experian, Equifax, or TrueCredit. If you have your credit score in writing, the dealer cannot claim you must pay a higher interest rate because your credit score is 650, when you are holding an 800 score in your hand. Next, look at car prices and get an idea from several sources, including the leading car Web sites, such as Cars.com and Edmunds.com. Also, look for manufacturer incentives.

For financing, you will want to find out from a bank, finance company, credit union, or other lender whether you will be approved for a loan. You can, if necessary, borrow against your 401(k) or insurance policy. Online loan sites such as Capital One Auto Finance and E-Loan have good track records for helping buyers get their cars. Get your loan approved or open a line of credit before going to the various dealers.

Dealers also provide financing. However, there are far too many stories of inflated financing charges and other problems associated with financing from dealerships to make this one of your first options, especially since auto loans can come from so many other sources.

Check with several lenders and look for the lowest annual percentage rates and the best terms. Remember, you are borrowing the amount after your down payment, so a $25,000 car with additional costs and taxes may be $29,000. If you can put down $6,000 or roughly 20 percent, you are borrowing at the most the remaining $23,000. Typically you should be able to pay off a car loan in three or four years. The longer the loan, the lower the monthly payments, but you will be making more payments and paying more in interest.

You can also lower the amount you will need to finance by getting a fair trade-in price on your current car. Again, shop around and see what you might get from a few dealers. You might also try selling your car on your own. There are numerous Web sites and local papers in which you post a car for sale. While it can be tedious, you can make more money if you sell the car yourself, and you'll therefore have more money available for the down payment.