Whether you financed a dozen cars or you are new to the game, getting a loan for a car can be a daunting experience. Of course, you can sleepwalk your way through it, squeeze your eyes shut, and hope for the best. Or you can give the task to us, let us do some homework, shop around, and get the best deal possible.
Financing a car means borrowing money typically from a bank, credit union, or financing arm of a car dealer and paying it back over time to purchase it today. This is how most of us buy a vehicle. Some buyers decide to lease instead, and some finance. But nearly all of us use someone else’s money to purchase a new or used.
At the time of purchase, we sign an agreement to pay a set amount each month for an agreed-upon number of months at the end of which, the agreement is fulfilled. Loan terms can vary for the length of time you choose and what you can afford. However, most last between 3 to 7 years.
Using that borrowed money, however, isn’t free. We must pay for it. The amount we must pay is known as interest. It is part of those monthly payments, along with the sales tax and other fees.
Much goes into determining a buyer’s interest rate. The person’s credit score, credit history, the amount of the loan, the length (term) of a loan, and so forth are weighed by the lender when assigning an interest rate.
Beyond that, different lenders may assign you different interest rates based on the same information. We always try to find the best lender for your situation with the best rate possible.
Basically, when you don’t pay cash for a car, you have two major avenues for borrowing the money: financing with a loan or leasing.
Car Financing with a Loan
This is how the majority of us buy a car. It’s usually fairly straightforward. Anyone who has purchased something — especially something pricy — using credit should have a certain comfort level with a car loan.
The main ingredients of a car loan:
Most of what we discuss with loan financing applies to new and used vehicles. However, interest rates tend to be higher for used than new. The average new car interest rate in the first half of 2021 was 4.09%. It was 8.66% for used cars.
With a car loan, if you make your payments on time, at the end of the loan term, you own the vehicle.
When you drive off a dealer’s lot in a new car, the dealer has been paid for it in full. Either you paid for it, or some lending institution did.
You may have had a trade-in covering some of the transaction cost of the new car and then you paid the rest in cash. Otherwise, you borrowed at least some of the cost of the new car from a lender.
Most of us wind up borrowing at least some of the cost from a lender.
Whatever that leftover balance is will be the loan amount. In other words, the amount financed.
If you don’t already have financing in place at the time of the purchase, you will need to apply for a loan and wait while it’s approved. When your credit is good, approval might take 15 minutes. If your credit is not so good, it could take a day or two as the dealer shops the loan around.
In any case, before driving off in your shiny new car, you will typically sign a binding agreement to pay back the lender. The final loan amount will include the purchase balance and any cost or fees related to borrowing the money. These costs and fees will include the cost of borrowing the money (interest) and any fees the lender requires to make the loan.
The agreement also sets the loan’s term, otherwise known as the loan’s length. It will be stated in months: 24, 36, 48, and so forth. Your monthly car payment will be the exact amount required to pay off the loan balance at the end of its term.
Direct financing is usually the best way to get financing. Your personal bank or credit union usually has the best interest rates if you have excellent credit.
Dealership Financing is an option if you are purchasing your vehicle from a dealership. Dealers are usually motivated to sell you a car and will do everything possible to get you approved.
Bad Credit Car Loans are usually offered as an option through partners and affiliates. These loans are designed to get you in the vehicle, but you will pay relatively high-interest rates.