One of the most common questions I’ve ever come across is: “What is the correct way to Finance a car?” Which is why, today, I am going to share 4 smart tips that will help you finance a car like a pro.

The number one mistake people make when buying a car is that they don’t take the price of auto finance into consideration.

Quite contrary to the common belief: your car isn’t an investment. I mean, cars depreciate like crazy and therefore, it’s not very wise to pay interest on the car Loan.

Fast forward to a few years when you’re repaying the loan: The value of depreciation is higher than your ability to pay the loan. What does that leave you with? You owe more money than the worth of the car!

This is why I suggest you go through the terms of the total cost rather than just the Monthly Payments.

Here are my top 4 recommendations:

1. Begin with your credit report

It’s a good idea to check, track and understand your credit score and report before you go to purchase the car. 

Use free tools such as Credit Karma to help you gain an understanding of your credit score. This will help you figure out if you are eligible for best car loan rates.

Dealerships frequently advertise great interest on new cars such as 2.9%-1.9%. Some even go ahead and offer 0%.

However, what they leave out is the fine print that states that these rates can only be availed by individuals with the best credit scores, which generally is a FICO score of 750 or higher.

2. The Shorter, the Better

Keep the term short. I say this because short term loans are associated with high monthly payments but lower interest rates. And this is what you should want.

When you are negotiating with a salesperson, they will go to great lengths to reduce the amount of monthly payments. From $500 a month to $300 in a jiffy.

Most buyers will think they cracked a terrific deal but here’s what they often ignore: the amount of interest they will be paying. 

It’s common knowledge that the longer you take to repay the loan, the higher the amount of interest you’ll be needing to pay. Yet, most of us forget this when we make the purchase.

Yes, it’s tempting to stretch the loans for 6 or even 7 years to get a nominal monthly payment but this just means you’ll be paying a lot more interest. Most certainly, this will be upside down on your vehicle for the life of the loan.

3. 20% Downpayment is Crucial

Driving (and showing off) your new car without paying a single penny is tempting but it’s also very risky. 

Why?

If you find yourself in a situation where you have to sell your car, you might not be able to since you will owe more on the loan than the car’s actual worth. 

The solution?

A larger down payment. It will ensure that doesn’t happen by reducing the amount of money you owe. 

4. Use Cash to Pay for “Extras”

I strongly suggest buyers not to finance the additional expenses such as the documentation fees, registration fees, sales tax, extended warranty, etc.

Doing so will reduce your loan (and interest) by a seemingly small but worthy chunk of money.

More information on this topic is available here.

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