Understanding the Basics of Car Finance

Car finance is the process of buying a vehicle using borrowed funds. Most people buy vehicles financed by loans, although some may lease cars instead. Both options require a monthly financial commitment, and knowing how they work and the difference between them can help you land behind the wheel of a vehicle that’s right for you.

Loan terms, including annual percentage rates (APRs) and maximum amount that you can borrow are key factors in determining the cost of your financing. You should know these numbers before you visit a dealer to avoid surprises at the end of your transaction.

It’s smart to make a down payment, which reduces the amount of money you’ll need to borrow and lowers your overall costs. A higher down payment also gives you more leverage to negotiate with the lender on terms, such as the loan term and interest rate.

A shorter loan term, such as 24 to 36 months, can help you pay off your car faster and build equity more quickly. However, keep in mind that the longer your loan term, the more you’ll need to spend on interest.

Beware of “buy here, pay here” dealerships, which typically offer high-interest in-house auto loans to buyers with less-than-perfect credit. These dealers may not be willing to work with you to improve your credit or offer manufacturer-sponsored low rate incentives. It’s important to get pre-approval from several lenders before you head to the dealer. That way, you can take detailed cost and interest-rate information with you to compare financing options. car finance