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How to Finance a Car the Smart Way

a young girl and a dog smile as they look out the window of a car

If you’re shopping for a car, you’re probably interested in how you can get the best value for your money. Doing your research on how to finance a car the smart way can save you thousands and keep you from ending up in a bad financial situation.

There are multiple factors you should consider when taking out a car loan. To help you understand the best way to choose a car loan that’s right for you, we’ve developed this guide. Keep reading to find out more about how to finance a car the smart way.

Factors That Affect Your Car Loan

Before you head out to shop for a car loan, you’ll want to be aware of the factors that can affect the APR (annual percentage rate), term, and loan amount.

Your credit score

Your credit score is one of the most important factors impacting the APR. APR is the yearly interest rate you incur on the amount you borrow.

The difference between the APR offered to buyers with poor credit and buyers with excellent credit can be as much as 18% when financing through the auto dealership or 10% when financing with Telcoe. If you’re thinking about financing a car soon, it’s a good idea to start building your credit score as soon as possible.

Type of car you purchase

Used cars are seen as a bit riskier for lenders than new cars. Typically, this means they come with a slightly higher APR.

The down payment you make

How much money you put down on a car affects the loan and APR that you get. This is because the amount of money you need to borrow relative to the car’s value (loan-to-value ratio) dictates the APR you get.

Financial institution type

Where you get your loan from can affect the APR you get. Often, if you get a loan directly from the dealer, they may try to sell you on a much higher APR than you could get at another institution. On the other hand, credit unions typically have competitive, low rates as their not-for-profit status enables them to offer loans at rates that big banks cannot.

How To Finance a Car with the Best APR

Now that you understand the factors that affect your car loan, follow these tips to improve the loan you get.

Put more money down

As we mentioned, the more money you put down, the better APR you can get. If you’re able to save up money before you head out to shop for a loan, this can both improve your APR and shorten the length of your loan — meaning you’ll own your car faster.

Shop around

As with anything in life, the first deal you get offered may not always be the best. By shopping around, you’ll see the pros and cons of different loans. Keeping track of the different terms, APR, and perks you find as you shop around can help you make the best decision. Starting your search online using or or can save you time and gas. Knowing your comfort level on payment, rate, and the vehicle are all equally important.

Finance for a short term

The longer you finance your loan, the higher the APR typically gets. In general, lenders prefer — and reward — shorter loans because they carry less risk of the borrower defaulting on them. Thus, the shorter the loan, the better the APR.

Improve your credit

The better your credit score, the better the loan conditions. So in the time leading up to buying a car, be sure to make all your payments on time, pay down your debts, and be responsible with your credit cards.

Preapproval Helps You Finance a Car

Words that can change the car financing process: get approved before heading to the dealership!

Preapproval is the process in which you apply for preliminary approval for a particular loan from a financial institution. It’s usually very similar to the standard process of applying for a loan in that you’ll probably have to provide information about your finances, credit, and employment. Lenders will also do a hard credit inquiry.

Heading to the dealer with a preapproval in hand means you’ll have bargaining power. In addition, a preapproval can help you set a budget and stick to it. You’ll be less likely to fall victim to good salespeople who try to sell you on features you don’t need.

Protect Your Purchase

After you’ve decided on the best way to finance a car, you’ll want to consider whether loan add-on options are a good choice for you.

Loan add-ons include extended warranties, gap insurance, payment protection insurance, and depreciation protection. These options are designed to help you avoid incurring substantial financial damage that can dramatically affect your financial stability.

For example, gap insurance and depreciation protection are designed to protect you from a situation where your car is worth less than you owe on your loan, meaning that if you total it, you’ll be in the red. When financing a car, you should consider all the possibilities.

How to Finance a Car? Plan!

Financing a car starts with planning. At Telcoe Federal Credit Union, we can help you figure out how much car you can afford and how to finance it. Get started today!


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