When you have decided on the make, model, and options you want, the sales person will want to know how you are going to pay for your new car. Not many buyers pay cash for their new cars. If you have the money, paying cash is certainly the simplest way to buy, but that may not be the smartest method of handling the purchase. Instead of depleting your savings, or selling off an investment, to pay for your new car, it might be better to borrow the necessary amount.

If the borrowing costs are low enough, you could be money ahead, because your savings are not only still in tact, but also earning interest on the full amount during the total length of your loan. Meanwhile, your cost of borrowing is decreasing with each monthly payment. Compare the interest your money will earn with the total cost of borrowing. If the cost of borrowing is less, then it will pay you to finance at least a portion of the cost. Almost without exception, a down payment of some size will be required. Find out the minimum amount the dealer requires.

If you decide to finance your car purchase, then where should you borrow the money? There are about as many places wanting to loan you money as there there are cars to choose. Places eager to loan you money include banks, savings and loan institutions, finance companies, credit unions, friends and relatives.

Borrow through the dealer.
The dealer will offer to arrange financing for you, and that may be the method you should choose--particularly if he is offering low finance rates for a limited time during a special sales campaign. If that is the case, make sure the low rates apply to the car you want, and for the length of time you want your loan to run.

Borrow from a bank or credit union.
Because there is likely to be a wide range of interest rates, go also to the bank or savings and loan office where you are already a customer to find out what they will charge. Inquire at your credit union, too.

Borrow from a friend or relative.
Perhaps the lowest cost of borrowing will be from a friend or relative. Be careful, though. Sometimes having a loan with someone you know can lead to strained relationships, despite the best of intentions at the beginning. That is not worth the few bucks it might save you.

Be careful about rates, terms, etc.
Wherever you check for the cost of your loan, do not pay too much attention to the stated percentage rate. There are several different ways to calculate interest rates, so the percentage at one place may actually cost more than the same percentage at another place. What you really want is the bottom line, literally. How much, in dollars and cents, will the total cost of your loan be over the period of time it will be running? Get the figure in writing. That is the only way to really compare the costs of financing.

The length of time you want the loan to run will depend, likely, on the size of the monthly payments you can handle. Make the term as short as you can comfortably handle, allowing for added expenses both expected and unexpected. The joy of having a new car can be lost, if paying for it becomes a burden.

Never have a loan run longer than you expect to keep the car. Many lenders are willing to lend for 48 months, 60 months--or even longer terms--on new cars. The problem with taking out a 60 month loan, for example, is that you will not have positive equity in the car until you have had it for about four years. Remember, you do not have any equity until the amount you owe on the loan is less than the (declining) resale value of the car. You could easily find yourself stuck two or three years down the road with a car you no longer want that you cannot afford to sell or trade.

Do you use your car for business, even just for a small amount? It would be good to talk to your accountant. He can give you professional advice about how the best way would be to finance your new car. He should know the all the tax implications as well. For all buyers, the new tax laws make it less and less attractive to purchase a car as a deductible expense. Even interest deductions are being phased out.