How to Finance a Car
Financing a car means borrowing the money from a lender to pay for it. The lender will charge interest on the loan, which is a percentage of the loan that you must pay back in addition to the original loan amount. So in the end your paying back the total amount of the loan plus the interest amount.
The Loan Term
The loan term is the amount of time you have to pay back the money. The majority of car loans are paid back with monthly payments. Some people think that when you finance a car, the financing company lends you the money and then you own the car. In reality, the lender is buying the car and letting you use it. The lender technically owns the vehicle and you are agreeing to be responsible for it. You won't have the title to the car until you make your final loan payment. If you miss loan payments, the lender can repossess the car.
Your Credit Score
Your credit score will affect the amount of interest that you will be charged. Lenders use the score to predict how likely you are to pay them back. If your score is low, they'll think you're less likely to repay the loan and charge you more money to cover that risk. You should know what your credit score is and do your best to make sure it's high. If your score is low, paying off old bills and paying all of your bills on time will gradually bring your score up.
0% Interest
Some lenders offer zero-percent interest. In order to get zero-percent financing, you have to agree to a shorter term loan. This means your payments can be much higher. It also means you'll have the loan paid off more quickly.
Applying for the Loan
Don't apply to just one lender, shop around for the best deal. Contact your bank, credit unions, dealers and other lenders to find out what they're offering. This means filling out loan applications. The lender will pull your credit history and credit score and make you a loan offer based on that information.
Most car buyers assume that the car dealership always has the best financing deals. That's not always the case. Contact lenders and compare the financing they offer you with the financing the dealer offers you. While you should certainly consider the loan the dealership offers, it's a good idea to have an approved loan application from a bank or credit union when you go to the dealership. That way you'll know if the dealer is offering you a good financing deal, and you'll have an alternative if they're not.
Here are some pros and cons of different lenders:
Dealerships:
Pros:
- Fast and convenient.
- The rates are sometimes competitive.
Cons:
- High pressure.
- The loans are often front-loaded.
Banks and Credit Unions:
Pros:
- Competitive rates.
- Personal service.
- They often provide free life insurance or disability insurance with loans.
- The loans are usually simple interest loans.
Cons:
- Not as fast and convenient as dealership financing.
Online Financial Institutions:
Pros:
- The rates are usually competitive.
- They are quick and easy.
Cons:
- The service isn't as personal.
- There are scams to watch out for.
Home Equity Loans:
Pros:
- You can deduct some of the interest from your taxes.
Cons:
- You're tying your car to your home.
Borrowing From a Friend or Relative:
Pros:
- More flexible and easy.
- Your credit rating won't matter.
Cons:
- It could jeopardize the relationship if it doesn't work out.
Published on Wedsneday, November 20, 2008 - Email to a friend
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