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Financing: The Most Important Part of Shopping for Your New Car

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Consider your options to get the best deal in financing

Many people put a good deal of time into deciding on the perfect car for their next purchase. They have considered gas mileage, options, warranties, dealers, and even colors. Unfortunately, too many don't invest much time into what will prove to be the most important decision of all for years to come - the best way to finance their purchase. You can save hundreds, even thousands of dollars by comparing rates. Even that low promotional rate offered by the manufacturer on a new car may not be the best deal in the end. Your financial institution can offer much-needed advice on finding the loan best suited to you. Here are a few options to consider.

Auto manufacturers

On the plus side, there is no doubt this is the most convenient way to finance your vehicle. Most car manufacturers have their own lending subsidiary, such as GMAC and Ford Motor Credit, enabling you to choose your vehicle and loan in a single application process. Another big plus is the low-rate promotions sometimes offered.

There are some downsides to a manufacturer-supported loan that you need to be aware of. The special promotions usually apply to a limited number of models, so much-higher rates may apply to the car you want. Dealers often make as much profit on the financing as on the car itself, so be aware that they may not have your best interest in mind in the loan deal they offer. The best rates are usually available only to those with the most sterling credit ratings, so know what yours is before you apply. The best approach is to negotiate the price of the vehicle itself before discussing any loan terms at all, and to shop for the loan as a completely separate transaction.

Financial institutions

The rates at financial institutions are set, nonnegotiable rates, and are usually less expensive than dealer financing. Because your financial institution isn't attached to the dealer, it is also less inclined to push for add-ons like credit life insurance which, in your case, may be unnecessary. A wise loan officer is also aware of loans you may have never considered and can give you advice about other options that may have been presented to you.

If you're not buying a new car, your local financial institution is even more competitive, and rates for used cars are currently at historic lows. Where car dealers may offer "buy here, pay here" financing on used cars, your financial institution can almost surely offer you a loan with a much more attractive annual percentage rate. Your financial institution may also offer a percentage discount if you choose a direct deposit option and allow automatic withdrawals of your payment.

What a car dealer simply can't offer is a tax deduction on any of its loans. One of the few income tax deductions left for interest on personal loans is interest on a home equity loan. Interest paid on home loan payments up $100,000 is still deductible, no matter how you spend the money. Tax-smart loans offer the simplicity of a regular auto loan combined with the tax deductibility of a home equity loan. No closing procedures or other expenses are normally associated with a regular home equity loan, and you can borrow up to 100% of the equity in your home. In this case, the value of the vehicle you are purchasing becomes collateral for the loan. Do be aware that the tax benefit involves a lien on your home as well.

Other finance options to consider

Personal/Business Contract - Often called a lease, this option involves a fairly large deposit (usually up to 20%), lower monthly payments than traditional car loans, and a final payment in a predetermined lump sum. At the end of the monthly payments, you can pay the final lump sum and keep the car, return the car and owe nothing further, or exchange the car as a deposit toward another lease. The greatest advantage to you is that monthly payments are much lower than other financing arrangements. There are also several disadvantages: You do not own the car and lose it if you cannot pay the final lump sum. The terms of such contracts are based on total miles on the vehicle during the life of the agreement. Should you end up driving the car more than expected, there is a penalty for additional mileage. These arrangements are best if you plan to use the car only two to three years and are using it for business purposes.

Contract Hire - This is actually a straight rental. A fixed monthly rental charge is offered, based on the estimated miles you will drive the car in that period of time. The only added charges at the end of the rental period involve mileage overage.

Because there are so many options, it is important to consult with your trusted financial institution before making any decisions about how you will finance your next vehicle.

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