Loan Basics

Understanding Car Financing

Buying a car is something most of us do because we can't work or go to school without our own reliable transportation. Yet cars are expensive?both new and used. If you are like most drivers, you'll need to finance your car purchase. In other words, you'll need to take out a loan and pay interest. Financing a car is common, but that doesn't mean you shouldn't understand the various financing programs. There are a lot of options?and even pitfalls. A little studying and research on your part will help you strike a better financing deal.

Your credit rating is one of the most important factors influencing your car financing. It is always a good idea to review your credit rating before applying for a loan. There is as much to learn about credit scores as there is about loans.

For example, your score changes every time someone requests a copy of your credit report. The bottom line is: Know your credit rating before you negotiate financing.

Sources of Financing

Once you have an idea of what your car budget is, you can decide on a loan program. The specifics of your financing will depend on where you go for the loan. Dealerships, banks, credit unions, friends, and even online lenders can lend you money for your car.

Dealerships are the most convenient when it comes to financing because they are open long hours and can usually run your paperwork through while you are in the showroom. What you gain in convenience, however, you lose in interest rates and total financed amount.

The interest rate a dealership offers you is usually marked up, making it higher than most competitive rates. Dealer financing is often front-loaded, meaning you pay more interest up front. And, add-ons are very common with dealer financing.

Add-ons are offered to you when the loan package is being put together because they can be easily rolled into your total loan amount. Be alert when considering dealer financing, because they will sell you extended warranties, VIN etching, and insurance?all while charging an application fee.

Banks and credit unions are good sources of car financing because you probably already have a relationship with a local bank. Perhaps not quite as convenient up front (the application process could be a few days long), bank loans can be more convenient in the long run because you can consolidate your banking with one branch or bank.