How Does Financing a Car Work?

Deciding which new vehicle you want when shopping for a new whip is important, but figuring out how to pay for your new wheels is most important. Research company, Statista, cited the average price of a new car is nearly $37,000 and an average used car is $23,000. Unless you have that kind of money in an account ready to go or hidden under a mattress, you are either going to have to adjust your expectations about what kind of vehicle you can afford or consider financing.

What is financing?

Financing a vehicle is also known as an auto loan. An auto loan is when a financial institution (bank, car dealership, credit union, online lenders) lends you the money plus interest and fees to buy your vehicle. The terms are usually broken down into monthly payments for a specified period of time.

Prepare to Finance:

Before you stroll onto a car lot for the first time, you need to make sure you have done a little research- and not just about cloth or leather seats. The research you need to do is about what credit score you’re coming to the table with and what monthly payments you can afford with or without a downpayment. A quick monthly budget will give you an idea about what kind of payments your monthly income supports, but you need to remember just because you can afford it doesn’t mean you should. As for the credit score, the top three credit bureaus offer one free report a year for each person which will detail your credit score and give you an idea about what kind of interest rates you will be offered.

How to Finance:

Just like you are going to shop around for the best deal on your dream car, you want to shop around for the best deal on financing a car. You can start with your local bank or credit union but look around. A local credit union might have the best rates or maybe an online lender. When you pick the lender for you, get a letter of pre-approval from them. To get a pre-approval, you will have to provide proof of identity, your social security number, and proof of income at a minimum to allow the financial institution to pull a credit check. Hard pulls like those from a financial institution will cause a temporary 5-10 point drop in your credit score, but multiple hard pulls in 14 days all count as only one pull.

Once you have your pre-approval letter, it’s time to shop! After you and the dealership have negotiated the final price for your vehicle, the dealership’s financing department will contact your chosen lender to gather all the documents and information they need to finalize the sale. Waiting for the paperwork always takes a long time and does not indicate that there was a problem with your loan. Don’t worry. When the finance department and sales manager have compiled and reviewed all the information, they will review all of the conditions of your loan with you again and have you sign for your new car. The next part is the most fun- you get your keys and drive away!

Your car loan payments may not start immediately. There is occasionally a lag of a month or so before the payments are set to begin. Make sure you pay attention to your due dates and set up auto-pay or a system to remind you when they’re due. Because your loan carries interest, you might want to pay more every month to pay it off more quickly. Most lenders offer this without penalty.