How to Finance a Car

A car loan is one of the most popular types of loans among Americans. Buying a car is a pretty big purchase, and most people don’t have the money readily available to purchase one in cash. Learning how to finance a car and how to finance it the right way can be the difference between having a ride of your own and having a frustrating search for a car you can afford.

Financing a car with bad credit used to be nearly impossible. However, thousands of car dealerships today pride themselves in providing loans to car buyers with little to no credit. But how can you be sure which loan is right for you?

Vehicle loans come in all shapes and sizes – different interest rates, different loan terms and different ways to pay. Whether you have no credit or a top-tier score, you can learn which loan is right for you and how to finance the car of your dreams.

Finance Options

Whether you need to know how to finance a used car or are interested in driving a brand-new vehicle off the lot, there are a few options at your disposal. The finance method you choose depends on several factors, such as your credit score, type of loan you need, purchase price of the vehicle and age.

Used Car Loans

A used car is one that has had at least one previous owner, even if the model year is current. Used car loans are available to finance the cost of the car. These cars can offer the biggest bang for the buck, even with a few thousand miles on them, because the purchase price can be thousands less than a new car that is just one year older.

New Car Loans

When getting a new car, buyers have a few more options. They can choose to lease the vehicle, typically for two to three years, or finance it. They can finance the vehicle with the auto maker (known as a captive finance company), a bank that is approved by the dealer or find their own bank or credit union to provide them with a loan.

Leasing a New Car

Leasing typically requires a car down payment, which is a certain amount of money a buyer pays out of pocket to secure a monthly payment. A lease is essentially renting the car from the dealer, who owns it throughout the time that the lessee drives it.

The benefit of a lease is typically lower monthly payments, though lessees are restricted to driving a certain number of miles each year. If they go over the allotted mileage, they must pay a predetermined amount per mile (usually around $.10 per mile), which may not be a good option for ride-share drivers. At the end of the lease term, the lessee can return the vehicle or choose to buy it.

Auto Loan Rates

When securing a car loan, buyers must understand the expected interest they will pay on the life of the loan. An interest rate is a certain percentage that the lender keeps in exchange for providing the loan. The higher the rate, the more money the car buyer will pay over the life of the loan.

Auto loan rates depend on several factors, including the borrower’s credit score, his or her age and area of residence, age of the vehicle, loan term and total amount financed. Many borrowers believe that buying a used car will provide them with a lower rate, but the opposite is true. Since older cars are worth less, the lender is taking more of a risk if the borrower fails to pay.

Current car interest rates can be as low as zero percent and as high as 15 percent. Currently, the national average on a 60-month loan term is 4.21 percent. So, the total cost of a $20,000 car purchased at a 4.21 percent interest rate with a 60-month term results in a total cost of $22,214 after the interest is calculated.

Do I need to pay a car down payment?

A car down payment may not be required to secure a vehicle loan. A down payment is a certain amount of money that a car buyer pays up front before the loan is processed. The more money the buyer puts down, the lower the total amount financed.

Down payments are usually required for leases but are often negotiable. For example, to secure a low monthly lease payment of less than $300 per month, a dealership may require a buyer to pay $3,000 down. If they choose to only pay $2,000 down, the monthly payment will be higher because the total loan amount is higher.

Buyers who are financing a car with bad credit may not be able to avoid the down payment. Many lenders will provide loans to buyers with poor credit, but they must be able to pay a predetermined amount up front. Alternatively, lenders may accept another vehicle as a trade-in instead of a down payment.

Refinancing Your Car

Knowing how to refinance your car is important to understand all your options. Refinancing simply means using a new car loan to pay off the existing loan with a better interest rate, longer loan term or lower monthly payments.

Knowing when to refinance is just as important. Borrowers who run into financial troubles may choose to refinance their car for lower monthly payments. This is done by extending the life of the loan. Although they will be paying more interest over the long run by extending the loan term, their monthly payments may fit better into their budget.

Another key time to refinance is when interest rates drop. Buyers may be able to get a better rate by securing a new loan and paying off the old one. This means they will pay less for the vehicle throughout the life of the loan. Buyers should always pay attention to consumer loan rates.

Buyers who have improved credit scores are also ideal candidates for refinancing. Lenders typically provide loans with lower interest rates to car buyers with higher scores. After a few years of a steadily rising credit score, buyers can begin searching for a new lender who will provide them a better rate.