Understanding Basic Automobile Financing

Most everyone who buys a new car will need some type of automobile financing. New vehicles cost on average around $30,000. Depending on the year, mileage and other factors, used cars start at about $15,000 or less. There are several different types of automobile financing available depending on your credit score and the amount you will need to finance. Automobile financing can be arranged through banks, credit unions, and finance companies.

Some car buyers will deal directly with a lending institution to pre-arrange automobile financing before they decide what kind of car they want. This is called “direct lending.” The buyer is approved for a loan up to a maximum amount; the repayment arrangements and interest rate are settled before the buyer selects his or her vehicle. After the buyer and the automobile dealer make a deal, then the buyer uses the loan to pay the dealer. The advantage of a direct loan is that the buyer has already been approved for automobile financing and knows the maximum amount of the loan plus repayment terms. A disadvantage with this type of loan is that the buyer may not be able to take advantage of special automobile financing offers by the dealer.

Dealer finance option

One automobile finance option that car buyers may consider for automobile financing is the “dealer financing.” Typically, the car dealer and the buyer sign a contract and the dealer then sells the contract to an automobile finance company. The finance company will then collect the payments plus interest on the automobile loan. Dealer financing is often a good choice for the buyer because most car dealers can arrange discounted or lower rate loan offers that the buyer can not negotiate on his or her own. Dealers often deal with a number of lending institutions with varying finance options. Before discussing any automobile financing solutions, the dealer will get a copy of your credit report. Your credit report contains all the information about your past and current loans and other debts. Your payment history, including late payments and defaults, will be a determining factor in whether you will need a co-signer and typically the interest rate you will be charged. Your credit score will also affect the total amount of any automobile loan. The lower your score, the less money you will be able to borrow and you may pay a higher interest rate. It is a good idea to obtain a copy of your credit report with your credit score before you consider any automobile financing options.

Your credit score

Depending on your credit score, some automobile lending institutions and dealers may require that you obtain a co-signer before they will agree to loan you the money to buy a car. A co-signer will be equally liable for the entire loan amount. Essentially, if you fail to repay the automobile loan as agreed, responsibility for repayment will then be that of the co-signer. Typically, when someone is required to provide a co-signer on an automobile loan, they will turn to a family member or close friend. Make sure that you can afford the payments and will not default on the loan or your co-signer will have to pay.

Avoid automobile finance mistakes.

Automobile leasing