Compare discount financing to a cash rebate if both are offered. “Buy now and we’ll give you $500 cash, or provide a 1.9% loan for four years.” Which should you choose? It depends on a lot of factors. You have to do the calculations to determine which option is more advantageous for you. (See also “Consumer Incentives.”)

If you can afford to buy the car outright, do it - that's usually the least expensive way to buy a car. If you take out a loan, fork over as large a down payment as you can manage. In addition, pay as much per month as you can possibly budget to keep the length of the loan to a minimum. If you can’t put down at least 20% and finance the vehicle for four years or less, then you should consider buying a less expensive vehicle.

Be aware that there are several ways to lower monthly payments, but only a lower interest rate or a lower amount borrowed will decrease your total interest expense. If you take out a lengthy loan on a car, it makes intrinsic sense to buy one that will retain a high proportion of its value. This will shorten the time you are upside-down on the loan.

When is an interest rate not an interest rate? When it doesn’t include the hidden costs of a loan. All interest rates are not comparable. One rate may include a loan origination fee and expensive “simple” interest, while another may have no loan fee and cheaper “compound” interest. APR (Annual Percentage Rate) is a very specific term that factors in any hidden fees and tells you the rate you will actually pay when all those fees are taken into account. It is the apples-to-apples, comparable rate. Lenders are required by law to tell you the APR of your loan. You should use this rate, and only this rate, in your comparisons.

Interest Expense

As the length of the loan increases, the interest cost also increases, yet the monthly payment decreases. The principal, however, remains the same regardless of the length of the payment period. The total interest that you pay can be computed by adding up the monthly payments and subtracting the amount that you initially borrowed (the loan amount).