How to Finance a New Car

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So the old clunker is finally ready to be recycled or donated to charity. Or maybe a convertible has caught your fancy with the approach of summer.

Either way, you’ve decided to buy a new car. What’s the best way to finance it?

First, you might think about not financing at all and paying with cash. Yes, it may be a lot of money to lay out at one time, but the average car loan is hovering around 6%, according to the BankingMyWay survey. Paying cash would be like earning a guaranteed 6% return on your savings, since you’d avoid a 6% interest charge. That’s not bad when the average five-year certificate of deposit pays only about 2%.

OK, shelling out $30,000 at one time may be out of the question. In that case it makes sense to shop around for the best auto loan rate you can get. Use the auto loan search tool, then compare the best deal you can find with the financing offered by your dealer.

That may be harder than you expect. The dealer may offer you a choice between a low loan rate and a rebate. Often, you can get one or the other, not both. Then you have the option of borrowing from another lender, such as a bank or credit union. That way you can get the dealer’s rebate as well as a good loan rate, but maybe not as good as the dealer’s.

The problem is it all seems like apples and oranges. How do you know which combination is really cheapest in the end?

Take a look at the Dealer Financing vs. Credit Union Financing Calculator. It can turn apples and oranges into apples and apples.

The calculator’s default figures show a $20,000 auto purchase financed for 48 months. The down payment, trade-in allowance, sales tax and amount still owed on the trade-in vehicle stay the same regardless of which loan you get.

Your choice is between dealer financing at a very attractive 1.9%, but no rebate, and financing through your credit union at 4.5%, allowing you to get the manufacturer’s $2,500 rebate.

If your gut tells you the credit union deal is better, you’re right. Because of the rebate, you’d borrow $2,500 less with the credit union loan and save $40 a month in payments, despite the higher interest rate. Total savings over the life of the loan: about $1,900.

But if the dealer rate were lower or the credit union rate higher, the gap would be smaller. At some point, the combination would make the dealer financing the better deal. If the dealer charged 1.9%, offered a rebate of only $1,000, and the credit union charged 6%, dealer financing would be $426 cheaper over the four years.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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