8 Factors to Consider Before Financing a Car

In this article, we have covered 8 top factors to consider before financing a car and Cash Back Versus 0 Percent Financing:

Most dealerships offer car financing. And it’s tempting to get your loan through the dealer because it’s easy. You can sign up, be approved, and drive your new car off the lot all in the same day.

However, unless you can get a special deal like 0 percent financing, be sure to check out the rates on a loan from your bank or credit union before committing to the dealer’s offer.

Dealer financing sometimes is cheaper than a bank, but not always. You should contact your local bank, see what it can do for you, and compare its rates with what the dealer is offering.

If you can find a bank-financed car loan that has a lower interest rate than what you can get through the dealer and get preapproved before buying your car, you’ll be in a great position to negotiate on your price.

Here’s why: you know how much money you have, and you buy within that amount; the car salesperson knows you’re serious about buying, and he’ll do everything he can to be sure you buy from him; and you’re not at the mercy of the dealership to get your loan. Instead, the dealership has to work on your terms.

Factors to Consider Before Financing a Car

Consider the following factors when looking for and getting a car loan:

  • Compare interest rates

Shop around for interest rates. Often, credit unions offer the best rates on car loans, so be sure you look there as well as at banks and the dealership.

  • Go for simple

Instead of an installment loan, go for a simple interest loan, which lets you pay interest only on the remaining amount of your loan. The bank will figure out the total interest on your loan and set up a plan where you’ll pay the same amount each month for the life of your loan. That’s better than a front-end installment loan, which requires you to pay interest each month on the full amount of the loan.

  • Make a large down payment

Put down as much money as you can. The more you put down toward your car, the lower your interest rate will probably be. Plus, you’ll be financing less, thereby paying less interest overall.

  • Boost your down payment with rebates

Use rebates (money the car manufacturer offers you as an incentive to buy its cars) to make your down payment bigger. If you’re offered a rebate on a new car, by all means take advantage of it. But don’t buy a more expensive car just because you get a rebate.

  • Keep your loan short

Take the shortest loan term you can manage. Don’t pay back a loan over 5 years if you can do it in 3. Even though your monthly payment will be smaller on the 5-year loan, you’ll be paying interest for a longer time and end up paying more in the long run.

  • Pay off your loan early

If you can, it’s beneficial to pay off your loan early. Some lenders let you pay off a loan early, but others will penalize you if you do so. Be sure to find out about that before you sign for the loan. Don’t take out a loan that won’t permit you to pay it off early.

  • Consider a home-equity loan

The interest you pay on a car loan is not tax-deductible, but the interest on a home equity loan is. If you own a home and need to borrow money for a car, look into getting a home-equity loan to use instead of a car loan.

  • Pay off any credit cards first

Finally, don’t put extra money toward a 7 percent car loan if you have an 18 percent credit card bill outstanding. The extra money will go a lot farther if you use it to pay off the credit card bill.

Cash Back Versus 0 Percent Financing

Auto manufacturers want to sell you their cars, and many will make tempting offers to lure you onto the lot. At the beginning of 2016, for example, Mazda was offering 0 percent financing on the popular Mazda3, and Ford would sell you a brand-new Fusion with 0 percent financing for 5 years or more than $2,000 cash back.

If you can’t get an offer for 0 percent interest, it’s likely that you’d be able to find a deal for low financing. Some dealers combine low financing with cash-back offers or deals that start with 0 percent financing and increase over time depending on the length of the loan and other factors.

If you’re offered a choice between free financing and cash back, which should you take? Which option will save you more over the life of your loan?

Cash rebates and 0 percent financing deals will both reduce the monthly payments on your loan. Using the rebate as part or all of your down payment means that you’ll owe less over the life of the loan. Free financing means you’ll pay less because interest charges won’t be added to your monthly bill. You’ll have to make your monthly payments, of course, but they’ll be less than they would be with interest added.


Just because an auto manufacturer offers cash rebates and/or 0 percent financing doesn’t guarantee that you’ll qualify for it. You’ll need to have a solid credit history and good credit score for the finance company to approve a 0 percent interest deal. And, it’s likely that you’ll need to come up with a sizeable down payment in exchange for no interest.

If you do qualify for 0 percent financing and/or a cash rebate, you can find online calculators to help you figure out and compare which will help you to save more.

For free, easy-to-use calculators, check out edmunds.com/calculators/incentives-rebates.html or bankrate.com/calculators/auto/car-rebates-calculator.aspx. To use the calculators, you’ll need to know information such as your state’s vehicle sales tax rate, the total cost of the vehicle you’re buying before tax, the amount of the car manufacturer’s rebate, and the amount of your down payment.

Having to choose between 0 percent financing and cash back is a good problem to have. Just take your time to figure out which makes more sense for you.