How to Pay for Your New Car
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Understanding the different financing options -- car loans, leasing or paying cash -- will help you reduce costs next time you head to the dealership for a new car.

You're sitting in the dealership when the salesperson asks, "So, how are you going to finance your new car?"

The question leaves you a little confused. What is he really asking?

In the car business, the term financing is loosely used to mean that the dealership will either provide you with an auto loan to buy the car or lease the car to you. The opposite of "financing a car" would be buying it outright with one cash payment.

Although you can take out a bank loan to finance your car, many people like the convenience of getting a loan through the dealership. They can walk in, choose a car, fill out a credit application and drive away in a new car. They can do this at night or on the weekends when banks and credit unions are closed.

In exchange for this service, the dealer will often charge you more for your auto loan. How much more? That depends. If you have sterling credit, you might get a competitive interest rate and be eligible for special programs that lower your cost. However, if you have bad credit, or no credit, the dealer might charge a much higher interest rate for taking what is perceived as a risk on loaning you money.

So, going back to the salesperson's question, "How are you going to finance your new car?" your answer could be one of three things:
"I want to buy the car."
"I want to lease the car."
"I will be paying cash for the car."

Let's look in more detail at each of these financing options so you can know what to expect at the dealership:

"I want to buy the car."

If you decide to buy the car and you want the dealership to help you finance it, you will be asked to fill out a credit application. Based on your credit score, an auto loan will be arranged through the dealership's lending institution based on the negotiated price of the car and related expenses (sales tax, title and licensing fees). Loaning money is big business, and most auto manufacturers have their own companies to arrange car loans. For example, Nissan cars are often financed through Nissan Motor Acceptance Corp.

You will probably be asked how quickly you want to pay off your new car. Most auto loans are from three to five years -- 36 to 60 monthly payments. Different lengths of time can be arranged, if desired. Obviously, the longer you take to pay off the loan, the lower the payments will be. In addition, the amount of your monthly payment will depend on the interest rate, the length of the loan and the amount of your down payment. Keep in mind that the dealership will urge you to make a large down payment.

While you are paying off the balance you owe on your car, the lending institution will hold the car's title. Once all the payments are made, the car's title is sent to you and you finally own the car.