Let's say you've battled for the best deal and finally agreed to a price you can live with -- time to breathe a sigh of relief? Not exactly. Did you know that if you finance a new car through the dealership, the finance person is working on commission? That means that the financing deal you get is still up in the air, although they'll never tell you that. Those things that get added on in the final stages of the deal (extended warranties, undercoating, alarm systems, etc.) are often what the dealership makes the most money on. It's the finance-office person's job to upsell you on those items AFTER you've agreed to a price for the car with the salesman. You can estimate your payments by using a financial calculator.

What choices do you have for financing, what determines the interest rate you get, and how to determine if you're really getting the best deal, as well as some scams to watch out for. We'll even give you a cheat sheet to take with you when car shopping to help you figure out things like whether taking the rebate or getting the zero-percent interest deal is best.

If you're like most people, paying cash to buy a new car just isn't in the realm of possibility. And even if it's in the realm, you may not want to deplete your savings account to buy a new vehicle. This means that you're either going to be leasing the car, or buying the car by financing it. If you're buying, then you're probably financing it through the dealership, a bank or credit union, an online financial institute, or maybe even a family member.

While leasing is good for a lot of situations, it's a whole other animal, so in this article, we're focusing on financing. If you know you want to finance your car rather than pay cash, then you need to do your homework and decide how to get the best financing deal.

If you do have the money to pay cash for your car and are considering doing it, how do you know if it's really the right thing to do? Here are some instances when paying cash really is in your best interest.

If you could pay more interest by financing that amount of money than you could earn if you invested it or kept it in a savings account of some sort

If you don't have a very good credit rating and would have to pay a high interest rate to finance (more on this later)

Sources of Financing
There are several different ways that you can finance your car, and there are pros and cons about each of them.

Dealership
Pros: Convenient, fast, sometimes competitive
Cons: High pressure, usually not competitive; be prepared for a big sales push on add-ons; loans are often front-loaded (payments are made up of more interest in the beginning of the loan than toward the end -- that's bad if you think you may be paying the loan off early.)

Bank or credit union

Pros: Competitive rates, personal service, no sales pitch for add-ons; often can tell you if you're paying too much for a car; often provide free life insurance or disability insurance with loans; loans are usually simple interest loans (interest spread evenly throughout the term of the loan)
Cons: Not as convenient as dealership financing -- can't set it up at night or on the weekend

Online financial institution

Pros: Usually competitive rates, quick, easy
Cons: Not a personal service; dealing with an unknown; some scams to watch out for

Home equity loan:

Pros: You can deduct some of the interest from your taxes; competitive rates
Cons: You're tying your car to your home (may be risky)

Family member or friend

Pros: Personal service, easy, sometimes flexible; usually competitive rates
Cons: Could jeopardize a relationship
Determining the Rate
The interest rate you get when financing a new or used car can vary quite a bit from the advertised rates you see on TV or read in the paper. Probably the biggest influence on your rate is your credit rating (see How Credit Scores Work to get the full story). Your credit history and credit score tell lenders a lot about your money habits and are designed to give them an idea of what their risk is if they loan you money. They often raise the interest rate if your loan is seen as high-risk.

Another thing that affects the rate you get is the length (term) of the loan. Typically, the shorter the loan, the lower the rate. Keep in mind that the shorter the term, the higher your payments will be.

Used cars will have higher rates than new cars. The newer the car, the lower the rate. (You may find an exception to this rule at some credit unions. Some give the same interest rate for new and used cars.)

Your geographic location can also be a factor in the rate you get. Your cousin may have gotten 7 percent on the other side of the country, but in your home town, 8.5 percent may be the lowest rate you can find.

Why You Should Shop for a Loan

To avoid having to deal with the potential scams and high costs of financing through the dealership, you may want to explore all of your financing options before you get to that point. By preparing yourself with good information and knowing what your options are, you can make a much better financial decision. Don't let the excitement of driving off the lot in that new car distort your perspective on things and cloud your judgement. That's just what the salesman wants!
Before you start shopping for cars, you should shop for the money to buy a car. Before you can shop for the money, however, you have to figure out how much of a car payment you can afford to pay each month. Once you know how much you can afford, use one of the hundreds of online car payment calculators to find out what that total car purchase price can be. You'll need to know the current average interest rates for car loans before you can calculate that, so also visit an online banking site to see what the best interest rates are at the time.

Here is an example of how this would work. Let's say you've looked at your budget and know you can afford a monthly car payment of $300. You've also looked at interest rates and see that the average rate is around 6% right now. If you know you are willing to pay that $300 every month for the next five years, then, calculating backwards, you'll know to look at cars that cost around $13,000. Try this calculator if you don't want to have to figure out your budget first.

By approaching the car buying monster from this angle, you can more easily end up with a car you can afford (even if you don't end up with the car you've been fantasizing about). Still, this is the smart way to go about it. Don't wait until you're at the dealership, talking with the salesperson, to figure out the total car price you can afford. Of course, that's what they would like you to do; and they only want you to think about that monthly payment, because they can always stretch out the term of the loan to get close to the payment you want to make. Plus, remember the funny thing about perspectives. As a buyer, when telling the salesman you want a payment around $300 and no higher than $350, you know you're leaning toward the $300. The salesman, on the other hand, hears only the high number.