How Does Car Financing Works

car finance

Do you want to know how car financing works? Read this article to learn more.

Buying a brand new car is not as easy as it looks. There are many things to do and many things to consider before you’ll be able to drive it home. The first step is to select a car and negotiate with a sales representative. Once you have the best deal possible, it is time to figure out your payment terms. In this article, we will list all available sources of financing, how to get the best deal and what you need to consider and look out for.

Source of Financing

First up, you must know all the possible sources of financing that you can use to get a new car. Getting familiar with the items in this list will help you assess the best deal you can get. Without further ado, here is a list of the different sources of financing.

  1. Bank or Credit Union
  2. Official Financial Institution
  3. Dealership
  4. Family Member or Friend
  5. Home Equity Loan

Determine the Interest

Now that you know the different sources of financing, it is now time to determine the amount of interest. When financing a new or used car, the interest rate you obtain can differ significantly from what is promoted on TV or in the newspaper. Many things may affect your interest rates, such as credit score, length of loan, car quality, and geographic location. Let’s check them all one by one.

The credit score is your ability to pay loans and how financially secure you are. It tells lenders about your history and how much risk they are putting into loaning you money. The higher the credit score, the lower your interest rate will be.

Another thing that affects your interest rate is the length of your loan. If your loan has a shorter term, your interest rate will be relatively lower. But if you choose a longer-term loan, the interest rate will also rise.

When buying a car, it’s crucial if your vehicle is old or new. Older cars have higher interest rates.

Dealer Financing

When financing through the car dealer, keep in mind that the Finance department is frequently a larger profit machine than the sales department. The business manager forwards your payment information to the debtor with whom they work. The business manager then marks up the lowest accepted interest rate. The marked-up price represents the dealer’s profit from the financing. This is why, all through the process, you must keep negotiating. This financing is simply another product sold by the dealership, referred to as a Retail Installment Sales Contract (RISC).

  • Special Incentives

These are the small discounts, or no interest rate offers that they give out to sell their products.

  • Factory-to-Consumer Rebates

These are discounts that the car company offers you straightforwardly as a reason to invest in a particular vehicle. They make them available when more of that specific vehicle is on car lots than they’d like to see. As a result, they give the discount to move the cars off the car lots. The deals are not included in the dealership’s package and should not be considered when negotiating the selling price with the sales representative. Allow them to attempt to use the discount to reduce the purchase price.

  • 0% APR (Annual Percentage Rate)

You should take the chance whenever present, especially if you can handle the length of the loan. To obtain zero-percent financing, you must agree to a relatively short-term lease, sometimes as little as 24 to 36 months. This means your fees will be pretty high. A great advantage is that this means you’ll have the debt paid off fast.

Things to Consider

Since we’ve covered all the payment terms and source of funding you need to know, it’s time to talk about what you should consider while you’re at the dealership and before you finalize everything. These are just a few things, may it be an add-on or something, that you will need in the long run, so make sure to get it done right away. To help you get the perfect car for you, here is a list of the things you should consider when buying a car.

1. Insurance

Most dealers offer life and disability insurance right at the bat. However, you should know that this isn’t mandatory, and you can always get one somewhere else if you feel like it’s too pricey.

2. Payment negotiations

You must be aware that you can make negotiations with your interest rate. Ensure that all information in the contract is accurate.

3. Car protection

Ensure that your car has a Rust Perforation Warranty because all of the undercoat and rust protection should already be applied at the factory.

4. Extended warranties

Some business managers will offer you an extended warranty, so you should be aware of what’s included in the contract for your car. If the content is comprehensive enough, then you’re good to go.

5. Alarm Systems and Windows Etching

Protecting your car from theft is something you would want to invest in, but make sure that the price is right. Most dealerships charge high fees for alarm systems when you can buy an alarm system and install it yourself for less than half of the cost.

What to Watch Out For

Before we end this article, you must know the things that you should watch out for. Knowing these basic things will help you get the best deal. Make sure to watch out for the following:

1. Additional Dealer Markup

These charges can include rustproofing and undercoating. If these charges are included in the contract, always try negotiating them.

2. Spot Delivery

Always ensure that you will be signing a finalized contract in which every detail has been approved and correctly included. Keep an eye out for the phrase “subject to financing.”

3. Know your Total Amount

Check that your down payment, rebates, and trade-in are correctly applied to the car’s purchase price.

4. Credit Reports with Cash Payment

Allow someone to run your credit report only if you intend to finance with them. Your credit score may decrease each time it is run.

Why is Loan Shopping Important?

To prevent possible scams and high prices, you should look into all of your funding sources before you get to that juncture. You can make a far better judgment call if you prepare yourself with valuable information and recognize what your choices are. Let’s not let the anticipation of driving off the lot with a new car manipulate your point of view or cloud your judgment.

Before you begin looking for cars, you should search for the finances to purchase a vehicle. However, before you can start looking for money, you must first determine how much of a car loan you can afford each month. Don’t wait once you’re at the dealer and conversing with a sales representative to figure out how much you can finance for car.

What to do before Going to a Dealership

  1. Visit the website of the manufacturer for any special deals that you may be eligible for.
  2. Always remember that raising your down payment is way better than getting a 0% APR deal.
  3. Have your accurate credit report with you and make sure it is double-checked for any mistake.
  4. If you know what car you want to get, print out its pricing from the manufacturer’s website so that you’ll see the cost of the vehicle, including all the features you want to get.
  5. Be aware of your maximum budget when buying a car.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.