The Money Question:
How to Finance an Auto Purchase

Last updated:

You’ve finally saved up enough money for a down payment, acquired a steady job, or your old ride simply isn’t worth repairing anymore. Before you head to the car lot to test drive a new vehicle, you must prepare yourself for making this important purchase. In order to select a car that you can truly enjoy, you need to calculate how much your maximum monthly payment will be, and how you will finance your new vehicle. You’ll also need to decide if a car company’s in-house finance department or a local bank or credit union offers the best loan options for your particular situation. Both types of financial institutions are quite common and offer a variety of loans to fit the needs of first-time car buyers.

It’s a good idea to speak with a loan specialist at your bank or a professional financial planner before you make your first vehicle purchase. Such experts will be able to explain the process of financing a car loan and help you feel comfortable and confident before you set down to negotiate at the dealership. In the mean time, take a look at this list of common terms used in the world of automotive financing so that you can make a little sense of the offers slick car salesmen are quick to pass along as soon as you step on the lot:

How To Finance Your Next Auto Purchase: Most Common Financing Terms

  1. 1

    Annual Percentage Rate (APR)

    When you borrow money to purchase a vehicle, the financial institution that supplies the money must make a profit. To do this, they charge you a fee equal to a certain percentage of your total loan amount every single year. For example, if you get a loan for $15,000 and your APR is two percent, you will pay a total of $300 per year to the loan company as a fee for borrowing the money. The APR stays the same throughout the life of the loan. APR is often referred to as the finance rate or loan rate.

  2. 2

    Manufacturer’s Suggested Retail Price (SRP)

    This is the price that you will see on the window sticker. The MSRP for one particular vehicle will be the same on an identical vehicle at another dealership. This is the price the car manufacturer suggests that it sell for. The MSRP isn’t necessarily the price that you will pay for the car. Bargaining might lower it by several thousand dollars while financing costs will raise your actual total considerably.

  3. 3


    These incentives are a popular way for car dealerships to get customers to purchase new vehicles. Car companies often advertise rebates of one or two thousand dollars for a limited time only to entice drivers to buy. As the purchaser, you have two options. You can deduct the amount of the rebate from the total price of the vehicle or you can receive a check in the mail for the rebate amount.

  4. 4


    This is a common term used in all types of loans. The principal is simply the total amount of money that you are borrowing.

  5. 5


    If you decide to obtain a car loan from a bank or other financial institution, you may want to get pre-qualified before you seriously search for a potential vehicle. A loan officer will determine the maximum amount of money your credit score will enable you to borrow and offer you a potential APR. When you go to the dealership to look for a new car, you will already know your maximum budget.

  6. 6

    GAP Insurance

    This optional expense is insurance for the difference between the amount you owe on a brand new vehicle and the actual value of the car, what your automobile insurance company will reimburse if it is totaled or stolen. Since new cars depreciate faster than you pay off your loan, you would likely owe several thousand dollars in the case of an accident or theft. Typically, the small monthly expense of GAP insurance is well worth the peace of mind.

  7. 7

    Down Payment

    You may be required to pay a particular sum of money at the time of financing an auto purchase. This is called a down payment. While auto loans are often offered with no money required at the signing of the loan, you may be required to pay a sizable down payment if your credit is less than desirable.

  8. 8

    Acquisition Fee

    If you finance your vehicle purchase through the dealership, it is likely to charge an acquisition fee that supposedly covers the cost of processing the loan, purchasing credit reports, and other paperwork. This fee can be avoided by financing at a bank, credit union, or other financial institution.

  9. 9

    Dealer Invoice

    The price that the dealership paid for the vehicle. Occasionally, dealers will advertise that they are selling cars for less than dealer invoice. Be aware that they are still making money by charging purchasers a variety of fees.

  10. q

    Documentation Fee

    This negotiable fee is charged by the dealership to process the documents needed to transfer the title of the vehicle into your name. Documentation fees should be no more than two hundred dollars.

Don’t let financing your first auto purchase become too stressful.

Remember, there’s no reason to hurry. Take your time and investigate all possible finance options before you beginning the process of acquiring a loan.