Car Finance Options: 8 Common FAQs
When you're ready to purchase a vehicle, not only do you have to determine the type of car you want, but you also have to consider how to get the financing you need.
Here are 8 frequently asked questions related to car finance options that can help make the process of researching and securing an auto loan easier.
What Does It Mean To Finance A Car?
When you finance a car, you're getting a loan from a bank, credit union, or dealership to cover the cost of the vehicle.
You make monthly payments on the car, including the price of the vehicle, interest, and all associated fees based on the terms of the contract. Car loans are usually secured and the vehicle is used as collateral in case you default on the loan.
What Are The Requirements To Secure Car Financing?
No matter what car finance option you choose, you generally need to meet certain requirements to qualify. These requirements are related to your income, credit score, credit history, and other financial data.
Lenders will review your credit history and credit score to determine your creditworthiness and the interest rate you qualify for. Although there is no magic number to secure a car loan, your score greatly impacts your ability to get approved.
According to credit-reporting agency Experian, the average credit score in 2018 for a new auto loan was 717, while the average score for a used car loan was 661.
Where Can I Finance My Car?
There are three primary options to secure car financing. You can go through a car dealership, bank, or credit union.
Here's a brief summary of information regarding each choice.
Credit unions are nonprofit organizations that are owned by their members. As a member of a credit union, one of the benefits is that you qualify for lower interest rates on loans. You can also receive a pre-approval with a credit union.
Credit unions are more likely to approve loans for older vehicles, for people with less than excellent credit, and even private seller loans. They are also known for having great customer service, which is very helpful when securing car financing.
Financing through a bank generally provides a quick and easy application process. You can get a pre-approval, which is beneficial when obtaining financing because it allows you to compare various loan offers before committing to one lender. If you are getting a newer vehicle and have excellent credit, choosing a bank is a great choice to consider.
When you get dealership financing, the dealership you purchase your vehicle from finds a bank or credit union in their network to approve your financing. What their bank or credit union looks at is similar to what they'd want if you went to them directly. However, the dealership does all of the legwork for you as far as sending your application to multiple potential lenders.
One important thing to note is that with securing financing through a dealership you will likely be charged higher interest rates than if you go directly to a bank or credit union since the dealership takes a cut.
Some dealerships also offer in-house financing. This is typically for those who otherwise wouldn't qualify for financing. You will usually pay the most in interest if you choose in-house dealership financing.
How Much Should My Loan Be?
The amount you qualify for is based on your income and your credit. You can use a car loan calculator to get a general estimate of what you could be approved for, but going through the pre-approval process is the best way to get an accurate result.
No matter what amount you're approved for, be sure that it fits your budget. Sometimes you'll get approved for more than you feel comfortable spending. You don't have to accept the full loan amount. Paying more for a vehicle than you feel comfortable can put you in a difficult financial situation.
How Much Will My Monthly Payment Be?
Your monthly loan payment is determined by the cost of your vehicle, your interest rate, the repayment time frame, and other fees included in the purchase of your car, such as taxes, dealership fees, warranties, etc.
You'll repay the total amount of your loan based on the terms outlined in your contract.
What Do I Do Once I'm Approved?
Once you receive final approval, there are a few additional steps you need to take.
First, prepare and exchange any funds outlined in your contract, such as the money for your down payment. You might also need to submit additional documentation to the lender, such as your proof of insurance. Your lender will let you know of any other steps that need to be taken to fulfill your loan.
Can I Pay Off My Loan Early?
Your contract will determine whether you can prepay your loan and, if so, the conditions surrounding a prepayment. Some lenders will allow for an early payoff while others have requirements regarding prepayment, such as paying a penalty. This is something to consider when comparing lenders.
Questions About Car Finance Options
While these are eight frequently asked questions regarding car finance options, you might still have additional questions in mind.