FINANCING YOUR CAR

WHAT IS CAR FINANCING ?

Car financing is a loan that you use on top of your down payment to buy a car. In exchange for the loan, you pay the lender a certain amount every month for a set length of time. Missing too many payments can lead to your car getting repossessed, or taken, by the lender.

WHAT AFFECTS THE MONTHLY PAYMENT ?

Many things affect the monthly payment on your auto loan, including the price of the car and how much you can afford for the down payment. The loan you take out will cover the difference between the down payment and the total cost, so putting more down right away can bring your monthly payment down.

The term of the loan, or how long you have to pay back the loan, also affects the monthly payment significantly. Loan terms are expressed in months and usually range from 36-72 months, though some may be shorter or longer. When your repayment is more spread out, you pay less each month. A shorter term means your monthly payments will be higher.

This is where the interest rate, sometimes called the annual percentage rate or APR, on your car loan comes into play. If you’re comparing two or more loans with the same term, the one with the lowest APR will cost you less in the long term because you will have accumulated less interest. However, if you’re comparing loans with the same interest rate, but different terms, then the auto loan with the shorter term will mean you pay less in interest even though your monthly payments are higher.

The interest rate, in turn, is affected by your credit score and credit history, your down payment, and even what kind of car you’re financing.

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WHAT AFFECTS THE MONTHLY PAYMENT ?

Many things affect the monthly payment on your auto loan, including the price of the car and how much you can afford for the down payment. The loan you take out will cover the difference between the down payment and the total cost, so putting more down right away can bring your monthly payment down.

The term of the loan, or how long you have to pay back the loan, also affects the monthly payment significantly. Loan terms are expressed in months and usually range from 36-72 months, though some may be shorter or longer. When your repayment is more spread out, you pay less each month. A shorter term means your monthly payments will be higher.

This is where the interest rate, sometimes called the annual percentage rate or APR, on your car loan comes into play. If you’re comparing two or more loans with the same term, the one with the lowest APR will cost you less in the long term because you will have accumulated less interest. However, if you’re comparing loans with the same interest rate, but different terms, then the auto loan with the shorter term will mean you pay less in interest even though your monthly payments are higher.

The interest rate, in turn, is affected by your credit score and credit history, your down payment, and even what kind of car you’re financing.

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WHO FINANCES CARS ?

Banks and credit unions are a good place to get car loans. If you go to a bank before you buy a car and can tell them about how much the car will cost, they will look into your credit history and preapprove you for a loan. It should be noted, however, that the exact interest rate may change after you buy the car based on the exact amount of the loan and a more detailed look into your credit history, but it should not change too much.

There are online lenders that can preapprove you for a loan, as well. It is often easier to compare your options with these sites. Some of these sites are specifically made to help you compare car financing options from other lenders.

Car dealerships usually have car financing options, too. These options are usually the most expensive, as the dealerships are trying to make a profit

WHAT ARE THE ALTERNATIVES TO
CAR FINANCING ?

Most people can’t afford to buy a car outright and rely on an auto loan to pay for the car. Your options are limited if you don’t want to rely on a loan to buy a car, but you could consider leasing a car.

Leasing a car still involves a down payment and a credit history check, but the down payments are usually lower and you can switch out your car for a newer car every few years. Unfortunately, because you return the car to the dealership there are restrictions to how many miles you can drive the car and you have to keep your car in very good condition to avoid penalties.

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