Car Financing

Should I Finance?

This is the first question that should be seriously considered, and then reconsidered! At we're not in the business of selling cars or loans, but in giving you solid advice and providing free tools to help you calculate and shape your financial future. If you need a new car and don't have the money to buy one outright, then obviously you do need to get a loan. But if a new car is not a necessity, you should think about what else you could be doing with the money you're about to spend. By financing your car you'll not only be paying the cost of the car, but also interest to the lender. And, there is the opportunity cost that comes along with this expense. (See our Opportunity Cost Calculator.)

If you have the money to buy a car outright, the only way you should finance it is if you may need the cash for something more pressing, or you can use that money to make a higher return than the interest on the loan. Remember that financing a car carries additional costs, along with the burden of a monthly payment.

Which Car Should I Buy?

Car prices vary tremendously, and you should carefully consider the cost of your new car. At 8% interest over 30 years, $10,000 becomes $109,357.30 due to the value of compound interest. Spending an extra $10K today will stop you from earning almost $100K in interest (assuming you can earn 8%) over the next 30 years. So you might want to think twice about getting a car that's 10, 20, or even 30 thousand dollars more than you need to spend! The younger you are, the more your money will be worth in the future if you invest it now.

Another thing to consider is the cost of owning one car vs. another. Different cars get different miles per gallon, have different insurance rates, etc. Your monthly payment is not the only cost you should consider. Try our Car Comparison Calculator to compare the total cost of ownership of two different cars.

What Type of Loan Should I Get?

Most people who finance a car get a car loan, but if you have enough equity in your home you might consider a home equity loan. Both the addition to your monthly payments and your total interest payments can end up substantially lower using a home equity loan. However, you do need to consider the implications of tying your car (and the higher payment that goes with it) to your mortgage. If you're unable to make the additional payment you may put your house at risk. Try our Car Loan vs. Home Equity Loan Calculator to see how much you could save by using a home equity loan.

Some people with high credit card limits purchase a car on their credit card. This is generally a terrible idea as credit card interest rates are normally MUCH higher than either car loan rates or home equity loan rates, and are subject to ridiculous rate increases and fees. Avoid buying a car with your credit card at all costs, unless you're buying it to get points/miles and will pay it off immediately after making the purchase.

Interest Rates

Obviously, you should aim to get the lowest interest rate possible for your car loan. Often you'll get the best rate by using a home equity loan as mentioned in the section above. Otherwise, your interest rate will be based on a combination of your credit and current rates. You should shop around, as interest rates make a very big difference in both your monthly payments and total interest paid over the life of your loan. Use our Car Loan Comparison Calculator to see the affect different interest rates will have on your loan, and check with both dealers and banks to find the best rate you can get.


The term of your loan (amount of time you'll have it) is something you're likely to have significant control over. Car loans are typically for 3, 4, or 5 years. Again, use our Car Loan Comparison Calculator to see the affect various terms will have on your monthly payment and interest paid. With a shorter term you'll be paying more each month, but you'll pay off your car faster and pay less interest overall. Conversely, a longer term will mean a lower monthly payment but higher interest and payments in total. The term you choose should be based both on what you can afford, and your investment opportunities. If you can make more by investing your money than you're paying in interest, it makes sense to have a longer term. But if your return on investments is lower than your auto loan interest rate, then you're better off paying off your loan faster.