Most Americans do not purchase cars with cash, they finance them. When you finance a car, you pay interest on the money that you borrow from the bank. What that means is that it's extremely important to compare auto rates before purchasing a new car. The amount of interest that you pay can drastically affect your total payment for the vehicle that you buy. There are many incentives available to buyers, but it's important that you understand them before you make a final decision. Read on to learn how to compare auto rates.

1. • 1

     ~ Know Your Credit ~

     Before you start shopping for a new vehicle, it's wise to know what your credit report says about you. You will be in a much better position to get a good loan if you know your own credit score.

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     ~ Shop Your Own Loan ~

     You'll get an offer from a car dealership from the lenders that they deal with and they'll typically present you with the "best" offer. To truly compare auto rates, it's wise to shop your own loan. If you use a credit union, you can fill out an application with them to see what rate they will offer you. Now you have something to compare the dealerships rates with. You can also use numerous online services to see what rates are available to you.

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     ~ Pay Close Attention to Terms ~

     A 5% interest rate may sound better than a 6% interest rate, but what if the 5% is being compounded? Read the terms very carefully so that you understand exactly what you are paying. Get your final payout amount so that you can see in dollars and cents what your final payment amount will be.

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     ~ Be Wary of Cash Incentives ~

     Cash incentives are a great way that car dealers get buyers into their showroom. When you compare auto rates, though, you should make sure that the value of the incentive will outweigh the total interest that you'll pay. For example, many lenders will offer a $2,500 cash-back incentive OR 2% interest. Do the math before you decide so that you can see what is the better deal for you. If the lower interest rate saves you more money than the amount of the cash incentive, it's better to go with the lower interest rate.