Financing That New Car, Part 2

In Part 1, we looked at the new-car financing you're most likely to be offered by your dealer -- whether from a car manufacturer's finance arm or from an independent lender such as subprime auto-loan specialist Consumer Portfolio Services (Nasdaq: CPSS). As I noted, unless the dealer's financing offer is plainly unbeatable, you should shop around. There are lots of ways to finance a car, and spending a little time reviewing the options before you go shopping can save you time, hassle, and money.

The local (and not-so-local) bank
As your first step, check the rates being offered by banks in your area. You can start with the big names like Bank of America (NYSE: BAC) or Wells Fargo (NYSE: WFC), but don't stop there -- smaller regional or local banks often have more attractive rates than the big national players. Remember that you aren't obliged to get your loan from the bank you use for checking and savings, though they may give you a more favorable rate in exchange for being able to auto-debit your account for the loan payment every month.

Consider Internet-based banks, too. The money they save by not having to pay for all those marble lobbies and free lollipops often turns out to mean lower interest rates. To get a quick look at their rates, compared side-by-side with some local options, check out Bankrate.com (Nasdaq: RATE) and its auto loan section. After a few quick questions, you'll have a list of Internet-based and local options. It's worth noting that some of the Internet banks may offer you special incentives such as frequent-flier miles. If you'll use them, factor those into your calculation.

Membership has its privileges
Your next stop should be the local credit union. I've said it before and I'll say it again: I love my credit union. In fact, I first joined mine in order to get a great rate on a used-car loan and to take advantage of their personal service. (This wasn't quite an ordinary deal: The "used car" in question was a special-edition Corvette I was buying from a collector-car broker -- a glorified used-car dealer. My bank had balked before finally offering me a loan with a crazy-high rate, and I didn't want to deal with the 'Vette broker's shady finance company. The credit union valued the car accurately and offered me a rate comparable to a good new-car loan. I'm a customer for life ... but I digress.)

Anyway, loans from local credit unions can often beat the banks by a full percentage point, and come with personal service -- which often means they'll try to accommodate any special needs you might have. The catch is that you have to be a member of the credit union to benefit, and federal laws limit credit unions to a specific "field of membership." That said, finding one to join is usually pretty easy. Check out the Credit Union National Association's credit union finder to see what's available in your area.

Betting the ranch
Back in my sports-car-driving youth, I knew several guys of normal means who had financed audacious car purchases (think Ferraris) with home equity loans. There are obvious pros and cons to this approach: You might get a great rate, and you might be able to borrow more without busting your monthly budget, but the payments could go on a lot longer; and the consequences of defaulting on the loan are a little bigger than having the repo man drive off in your car in the middle of the night. Still, for some people, a home equity loan can be a sensible choice -- check out this handy-dandy Fool calculator to see if you're one of them.