Understanding The Basics Of Automobile Financing

Whether you are buying a brand new car or certified pre-owned cars, you will probably be wondering about how to finance your car. Here are the basics of car finance laid out in a nutshell.

Options of Financing

There are two choices of automobile finance, direct lending or finance through a dealership.

  1. If you opt for direct lending, then you will ET a loan directly from a lending institution like a bank, a car finance company or a credit union. You make an agreement that you will pay them the amount over certain duration of time through monthly payments. You will have to cover the original loan amount along with a charge.

Opting for direct lending gives you the choice of going to different lenders and getting the best rates of interest possible. This way you will be fully informed about the kind of payments that you will have to make.

  1. In dealership finance, you get the money through the dealership from where you are buying the car. You enter into a contract wherein you buy the car from the dealer and pay them the money over duration. Usually the dealer will sell your account to another lending institution who will act on their behalf.

Dealership finance is often a more convenient option because they can offer you various flexible methods of finance including special programs which can be availed on certain cars or have certain special criteria.

Pre-purchase Factors

There are a few important issues that you must consider before financing your vehicle.

  1. Look at both the state and central laws that regulate and control automobile finance. Knowing these will give you an idea of what you are entitled to and ensure that you don’t get cheated.
  2. Before going in for a loan, review your income and see how much your loan payments will affect your monthly expenses. Will your current income be enough to sustain the added burden of a car payment for a few years? Remember that the amount of finance will depend on the price of the car whether new or certified pre-owned cars, the APR or Annual Percentage Rate and the term of the loan.
  3. Remember that if you are paying for more than the market value of the car then you have negative equity on the car. This factor is important if you have considered using your car as a trade-in the future. Remember that the length of your loan will determine when you will have positive equity on the car. In case of negative equity you might need to make a larger down payment.

Applying for Finance

The Finance and Insurance Department of your dealership will ask you to fill an application with details including your SSN, past and present employment information, your sources of income, your total income monthly and so on. Your credit report will be scanned to get an idea of your financial history and your earlier and current debts. The dealership then ideally sends your application to an external lending institution who then determines its worthiness based on an evaluation of your financial history.

Ask if there are any special discounts or financial incentives that you qualify for.  There are often many cash back offers available on certain models or manufacturers. Remember to ask questions about the contract that you are signing. Put your signature on the contract only once the financing deal has been approved.

About the author

Jamie Welsh works for the F & I department of a reputed car dealership for the past 18 years. Jamie has handled the credit transactions of numerous clients in the past. In her free time, she likes to read novels.