First Car Guide for First Time Car Buyers

Most new-car buyers, and many used-car buyers, obtain financing at the dealers from whom they buy their cars. This is a  "one-stop-shopping" service provided by dealers to allow customers to take care of both purchasing and financing at the same time.

However, what is frequently misunderstood by many auto buyers is that car dealers DO NOT directly finance cars they sell. Dealers don't provide loans and leases. Dealers don't set financing details, such as interest rate. And dealers don't approve customers for loans.

Automobile financing is provided by banks, credit unions, loan companies, and "captive" financial companies associated with car manufacturers, such as Ford Motor Credit and GMAC. Dealers simply arrange financing on behalf of customers, as a service. Customers are free to get their financing.

Dealer financing and new cars

No, although in the case of new-car purchases, there may be good reason to accept dealer financing. Let's see why.

Car manufacturers frequently offer incentives to potential customers to help boost sales. These incentives typically come in the form of special loan terms such as low interest rates – or 0% interest – and reduced down payment. These offers are usually genuinely good deals and are better than you could find by shopping for your own financing at banks and loan companies. Most such offers come from car manufacturers' captive finance companies or large distributor-associated finance companies.

Many dealers also work with large national banks, such as Wells Fargo, local banks, and credit unions to help provide car loans. In this way a dealer can work out the best deal for his customers — and for himself.

Find your own financing
There are advantages to shopping for your own car loan prior to visiting your dealer. Get quotes from local banks, credit unions, and online loan companies such as eLoan.com and CapitalOne.com. With multiple quotes in hand, you'll have the ability to compare deals, including the deal offered by your dealer, and select the best one. You'll also find out if you have any credit or qualification problems that would otherwise pop up as a big surprise in the dealer's office.

How does it work
Applying for a car loan is very straightforward. Whether it's online or at a local bank, you'll need to fill out a loan application. You'll supply personal information, including your Social Security Number (needed for credit check), and financial information that will allow the loan company to evaluate your credit worthiness. You'll also need to know the approximate amount that you'll want to borrow, based on the prices of the cars that you are considering.

After summitting your application, the loan company will verify and evaluate your information, check your credit score,  and let you know if you've been approved. You'll also be told  the loan amount you've been approved for. It's possible that you won't get approved for the full amount of your request. Online loan applications tend to take much less time for an answer than an application at a local bank or credit union.

If approved, you'll receive instructions regarding how to have the funds transferred to your dealer.

Getting a loan for a used car

Try to avoid "buy-here-pay-here" used car lots. These tend to be lots that sell older, higher mileage, poor condition vehicles to people with bad credit. Interest rates are very high and terms are very strict. Many of the vehicles on these lots have been repossessed many times over. 

If you're buying a used car from an individual, either locally or online, you'll have to get your own financing since there's no one to do it for you. You'll need a bill of sale, a lien-free title, and, in many cases, arrange to let the loan company inspect the vehicle. You'll be given a bank check that you can give the seller.

Used-car loans have higher interest that new-car loans, and loan length is often limited, especially in the case of high-mileage vehicles. The loan company may not loan more than 80% of the vehicles current market value. Therefore, you'll need some cash to complete the amount required to purchase the vehicle.

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