Car financing is a new concept for most first-time car buyers. Car leasing and purchasing are generally the two options available to people who want to buy a car. However, there is a third option that appeals to many people, particularly those who cannot afford to make an outright payment in one go: Car financing. Car financing is a huge deal because it can mean the difference between having a new car and being stuck with your old one for another year.
Let’s find out how car financing works so you can decide if this is the best option for you.
How Does Car Financing Work?
You can borrow money from a financial institution when you finance a car. In exchange, the lender charges interest and possibly fees to borrow the money over a specific period.
Some car financing options are finance companies, banks, car dealerships, online lenders, and credit unions. Financing through a bank or credit union may be less expensive than getting a dealership loan. Also known as ‘buy-here, pay-here’ dealerships or in-house financing, most car dealers charge higher interest rates.
If you plan to finance a car, you will need to shop for the best loan and apply. If your loan is approved, you’ll make regular payments to pay off the loan, each of which is split into the following:
– The principal amount, which you pay toward your loan balance each month
– The interest amount, which clears the interest due
If you make late payments, a portion of your monthly payment may go to pay off the late fees.
Your loan amount, loan term, and annual percentage rate (APR) determine your monthly payment. The APR is one of the main factors that determine how much money you’ll end up paying for a vehicle. Multiple factors can influence your interest rate, including your loan term, whether you’re buying a new or used car, and your credit.
Most lenders will send a lien release document to the state transportation agency once you repay your loan in full. The car’s title is then updated and transferred to you.
Is Car Financing a Good Idea?
This entirely depends on your personal financial situation. You could avoid paying loan fees and interest if you pay in cash. But if this means draining your savings, it isn’t a wise step to take.
Financing is a good option if you need a new ride and need more cash to buy it immediately. It’s important to know how much of the car price is financed and how much will be paid upfront. For example, if you finance the entire cost of the car without making a down payment, you could owe more than your car’s worth.
By financing a car, you can take advantage of car manufacturer specials and dealership incentives, like rebates or 0% financing.
