Auto Financing: What You Need to Know
Auto Financing: What You Need to Know
Financing a car? Here’s what you need to know about auto loans.
Buying a car is a big decision, and it can be a little scary. But don’t worry. In this article, we’ll give you the facts about auto financing. Understanding your options can help you save money and take a little stress out of the car-buying process.
3 Ways to Buy a Car
- Paying Cash
If you DO have the money, paying cash for a car means you are paying the whole price of the vehicle upfront.
- Leasing
This isn’t exactly “buying” a car. Essentially, it’s long-term renting. You sign a lease agreement and make monthly payments for an agreed-upon term, typically three or four years.
- Financing
With this option, you use a loan to pay for the vehicle, which can come from a financial institution or through the dealership. If you choose to finance, you’re in good company. According to available data, 85% of new car and 50% of used car purchases use some form of financing.
2 Ways to Finance a Car Purchase
- Financial Institution
Also called direct financing, with this option you get a loan directly from a bank, credit union, or online lender. With direct financing, you can shop around and find competitive interest rates. Also, some financial institutions may offer discounted rates to their established customers.
- Dealership
With this option, you work with the dealer who will arrange the financing with a lender on your behalf. A car dealer is motivated to make a sale, and they may offer more flexible options compared to financing at a
financial institution. This might also be a good choice if you’re just starting to build your credit or have a lower credit score. Dealer financing is also convenient because you can shop for your car, test drive it, and complete the financing paperwork all in one visit.
3 Steps to Apply for a Loan
- Look at Your Budget
You will need to decide how much you can really afford. Factor in the cost of gas, maintenance and repairs, your monthly car payment, and insurance. The interest rate you’ll pay can be affected by your credit history, as well as other factors. Lenders and dealers aren’t obligated to give you the best rate available, so it pays to shop around for a loan that will fit your budget.
- Gather Necessary Documents
Once you’ve determined how much you can afford, you’ll want to pull together documents you’ll likely need during the loan process. Requirements vary by lender, but they generally include proof of the following: identity and residence, car insurance, and income. You can also expect a credit check.
- Apply and Compare
With your budget nailed down and your documents gathered, it’s time to apply to multiple lenders so that you can compare offers. You’ll want to consider the APR, the loan term, and monthly payment, plus the overall value of the car including make, model, age, and mileage.
The Bottom Line
When it comes to determining the best car loan, there are many things to consider. Taking the time to understand how auto loans work can help you make an informed decision before you buy. Your financial institution is always ready to help. Reach out if you want more information about financing a vehicle.
