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Home Finance

Understanding the Basics of Car Financing

Entstoday by Entstoday
April 5, 2022 - Updated on April 8, 2022
in Finance
Reading Time: 7 mins read
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Table of Contents

  • What is Car Financing?
  • How Does Car Financing Work?
  • Used Car Financing
  • Got a Bad Credit?
  • Car Financing Rates
  • In-House Car Financing
  • New Car Financing
  • Differences Between Leasing and Car Financing
  • Conclusion

The Basics and Important things to note about Car Financing



Economists have often talked about the gap between a man’s available resources and unlimited wants. Owning a car is one main desire for almost all humans due to the ease of mobility it affords the users.

You may be faced with the need of getting a car to get you to work faster but not have enough to get the car. This is one problem car financing sorts out for you. Car financing is however not complicated once the basics of the process are understood and followed through carefully.

After understanding the process of car financing and the available options, it is easier to choose one that would suit.

Also, read Your Credit Score and Its Significance.

What is Car Financing?

Financing a car is simply a process of taking out a loan on a car that you get to repay over a while. It is also referred to as an act of borrowing money to fund the purchase of a car. Car financing like most loan facilities is open to people to get cars and pay in installments.

To finance a car, your financial institution covers the cost of the car in form of installment payments. You make a down payment of a certain percentage of the car amount and the rest is covered by your loan company.

The lenders make their own money by placing interest on the loan, with additional charges for the loan processing and issuance. The financed car is used as collateral. You should know that car financing increases the total cost of acquiring the car because you will be paying back the loan amount and interest.

How Does Car Financing Work?

Financing a car can be very strenuous for a first-timer, but this can be done easily when the process is well understood. Once you understand how car financing work, you will have to be in a better state of knowledge to decide on the financing method to use.

Car financing works by the provision of loan facilities from financial institutions or other loaning institutions to cover the cost of the car. Car financing is a fixed loan since the interest and payment don’t change through its life span.

The first step in how car financing work is to choose the type of car you would want to buy. When using a loan to finance a car, you should consider:

  • The loan amount: This is the amount that would be left after you must have paid the deposit from the total cost of the car. It is simply the amount loaned to get the car.
  • The Annual Percentage Rate: This is also known as APR. This is the interest rate you pay on the loan used to finance the car. The APR should be thoroughly considered because it will reflect how much money will be left to pay.
  • The Loan Term: The term of the loan is the amount of time you have to repay the loan amount.

You can get car financing from banks, online lenders, finance companies, credit unions, and other car dealers. Financing a car through a bank or credit union is often less expensive than financing through dealerships because of the high-interest rates from the car dealers.

Some dealers provide financing for the car through the “buy-here, pay-here” and in-house financing methods.

Used Car Financing

There are a lot of benefits associated with the use of car financing for already used cars. Used car loans are cheaper and more affordable than car loans for new ones. A used car loan is a better choice if you have bad credit, you get a shorter-term loan since they cost less.

Experts tell people to buy a used car on a car loan rather than a new one because the new cars lose 10% of their value after purchase and another 10% after a year. The advice to buy a used car is because in that case, another person gets to pay the instant 20% depreciation on the car. You get to save a lot of money by going for used car financing.

Got a Bad Credit?

There may be a situation of having bad credit and the need to get a car. Not to worry, bad credit is not enough to stop you from getting a car loan. Financing a car with bad credit may seem difficult but not impossible.

There is a long list of companies that offer car financing to intended buyers with bad credit. To the company, the car itself acts as collateral when there is a default in payment. There is huge competition in the Car loan market, this helps you to enjoy less strictness from the companies.

Car loan companies such as auto Credit Express, Lending Tree, myAutoloan.com, and much more offer car financing for bad credit. The companies are reputable as a number of them have been in the business for over two decades.

You should however understand that the interest charged on a car loan for bad credit may seem higher due to the circumstances.



Car Financing Rates

Getting car financing like another kind of loan comes with its rates. Car financing rates are presented as APR (Average Percentage Rate) and are determined by several factors which include, your income, debt level, and credit score.

It is said that the biggest deciding factor of your car financing rate is your credit score. This is simply because the higher your credit score, the lower your car financing rate(you are viewed as less likely to default on payments).

According to an Automotive Finance Market Report, the average car loan interest rate is 3.86% which can be lower if your credit score is high. It was calculated that with a credit score above 780, you can get a rate below 3%. The rate however still depends on the car being used or new. The car financing rate offered by banks is slightly higher than those offered by credit unions.

Bank of America gives rates of 2.29% as a starting APR on new cars while PenFed Credit Union offers 0.99% on new car loans. This can all vary depending on your loan term.

Also, read Mortgage Refinancing Explained.

In-House Car Financing

An in-house car financing is you getting your auto loan directly from your car dealership. The process of in-house financing is easier and faster because the ones with third-party require time and the whole transaction may not be completed that same day. With in-house car financing, you can leave with the car the same day as the dealership does credit score themselves.

For in-house car financing, the deposit and consequent repayments are done directly to the car dealers. Your dealerships see to your desire to drive home your car that very day. In-house car financing gives you extended warranties, flexible rates, an opportunity to build a credit score, and easy approval of a loan.

New Car Financing

The terms for car financing for new and old cars are quite similar but there are certain differences between them still. The major difference between both cars is in the total cost of acquisition. Although used cars cost less than new ones, you are sure of buying the current model of a car. The rates of acquiring a new car are quite lower than the rates of a used car.

Differences Between Leasing and Car Financing

Leasing a car is another way of car financing with its process. Car financing is taking out a loan to acquire a car which includes the full cost of the car. Car leasing however are you paying a portion for the use of the vehicle with no transfer of ownership.

There may be an option to buy the car after the lease period but it is all depended on the lessor. We can agree that the major difference between both processes is in the final ownership of a car when the agreement is fulfilled.

Simply put, you’re borrowing to get a car in car financing but you pay for the time of using the car in leasing. You can always consider which is best for you.

Conclusion

You don’t have to wait till you have acquired the full amount to purchase your dream car because it may take forever. Your dream car may be old by then, this situation however is solved with car financing. Simply get your car and pay later. We have carefully explained some basics you should understand before taking the big step.



Before you go, read the Best Sites to Buy Cryptocurrencies with a Credit Card.

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