When you face a financial emergency, like an auto repair or unexpected medical bill, how do you pay for
it? If you’re like many Americans, you don’t have the cash on hand, so you pull out your credit card and
worry about paying the balance another day. Unfortunately, some people don’t have access to credit, or
can’t make new charges because of maxed out balances. Desperate, many of these people are forced
to rely on expensive payday loans or cash advances. But, there’s another way.

The Benefit of Having Emergency Funds

Imagine having a reserve of cash you could use to cover an emergency. You wouldn’t have to borrow
from next week’s paycheck nor would you have to put the balance on a credit card with a high interest
rate. You’d pull from your savings and you wouldn’t be left owing anything to anyone. That savings isn’t a
foreign concept; it’s called an emergency fund.

When you’re buying a car, there’s two ways to pay for it, with cash or with a loan. Not many people have
the cash to pay for a car upfront. Instead, they go through a lender to borrow the money. Auto financing
through a lender comes with costs, for example, finance charges that increase the total cost of the car.
Since different lenders have different terms, you should pay close attention to the car financing company
you go through to purchase your car.

Car Financing Options

Depending on where you purchase your car, you may have several different auto financing options.

• Some dealerships offer financing. Financing through your car dealer may be more convenient
  because you can get a loan on late evenings and weekends when banks are closed. However, the
  interest rates are often higher than other auto financing options. That means, you’ll end up paying
  more when you finance through a dealership, rather than if you’d gone with a bank. Many people
  who are unable to qualify for other types of financing opt for dealer financing.
• You may be able to finance through your bank or credit union. You can often find lower rate
  financing with a bank, but keep in mind that banks have income and credit history requirements for
  loan applicants.
• Some people use home equity loans or second mortgages to pay for their cars. You have to be
  careful about this option because if you ever fall behind on your payments, you risk losing both your
  car and your home.

Check Your Credit First

Your credit will have the most significant impact not only
on your ability to get a loan, but also the amount of the
loan you receive. The better your credit, the more likely
you’ll get a high loan with a low interest rate. On the
other hand, if you have a low credit score, you might
get a high interest rate, a low loan amount, or even
denied financing.

Before you start car shopping, first check your
credit report to see if there is any negative information
that could prevent you from getting a car loan. Negative
information includes things like late payments, collection
accounts, foreclosure, or tax liens. You can order a
free credit report by visiting www.annualcreditreport.com.

Rebates vs. Interest Rate Incentives

Often, you’ll see advertisements from dealers or manufacturers about rebates and interest rate
reductions on certain cars. Manufacturers typically offer rebates when they have a large inventory of a car
and they’d like to increase sales of that particular model. Interest rate reductions are often offered by
dealers and their financing companies to entice you to buy from them rather than other dealers.

If you’re choosing between a rebate and an interest rate reduction, the rebate will often result in the
lowest price, assuming the interest rate you ultimately receive isn’t much higher than the interest rate the
dealer is offering.

Typically, low dealer interest rates require you to have a good credit rating. Not only that, you often have
to agree to a shorter loan term, i.e. 24 to 48 months. Because the loan term is shorter, your monthly
payments are often higher than they would be if you were paying on your loan for a longer period of time.

How Much Can You Afford?

Before you start looking for car financing, you should know what size loan you can afford. First, decide
how much you can afford to spend on monthly car financing. Then, decide how many years you will spend
paying off your car. Multiply the number of years by 12 to come up with the number of months, e.g. 5
years X 12 is 60 months. Finally, multiply your monthly car financing amount by the number of months to
come up with the amount of loan you can afford. For example, $500 per month X 48 months, means you
can afford a car that’s around $24,000.

Shop Around

It’s always a good idea to shop around for the best car financing company. Since different lenders have
different terms and requirements you may be able to get a better loan in one place than another.

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