When you finance a car, you’re borrowing money from a financial institution, such as a bank or credit union, to pay for the vehicle. During the loan term, you will pay back the lender plus interest. Car finance can include a loan, lease or a combination of both. You should know how each works before you head to the dealership.
If you’re buying a new car, financing can help you build equity in the vehicle over time by paying off the balance of the purchase price. This is a great way to save money on monthly payments, avoid rapid vehicle depreciation and ensure your vehicle has the latest safety features. It can also improve your credit score by showing you are a responsible borrower and that you are making timely monthly payments.
Lenders assess the risk of financing a vehicle to people with poor credit or no credit differently, so it’s important to shop around. Having a high enough score and an acceptable payment history will allow you to qualify for a lower rate and longer loan term.
Before you head to the dealer, ask for an “out-the-door” price in writing, which includes the total cost of the vehicle before adding taxes and fees. This will help you compare offers on an apples-to-apples basis and catch any add-ons or other hidden costs. Then, you can focus on finding a vehicle with the right loan terms that fit your budget. car finance