Car Financing Basics

Financing a car can seem complicated, but it really isn’t as long as you’ve got the basics down. Here are some car financing basics that can make applying for car financing a whole lot easier, especially for first-time car buyers.

Financing a Car Increases Its Total Cost

It’s important to know that financing increases the total cost of your car. This happens because you pay for the cost of financing (interest plus other loan charges) in addition to the cost of the vehicle.

Financing a Car With a Loan

There are three factors to take into account when using a loan to finance your car purchase:

Loan amount: this is the total amount you are borrowing to buy the car.

Annual Percentage Rate or APR: this is the interest rate you will be paying on your loan.

Loan term:  this is the duration or period you have to pay back the loan.

Interest Rate

 The interest rate, or APR, has a big impact on the total cost of the loan. Lenders decide the interest rate based on your credit score, debt-to-income ratio, and other such factors. The interest rate is usually higher for a used car as compared to a new one.

Leasing a Car

 Leasing a car is a popular form of car financing. When you lease a car, you only pay for using the car and not for the car itself. With a lease, you make a lower monthly payment than if you were to buy the same car. If you decide to lease, you will likely have to be aware of how many miles you drive (most leases charge a per-mile fee above the set annual number of miles) and you need to take very good care of the vehicle. That said, leasing works well for several people, so make sure to also consider this option.

Refinancing a Car Loan

 If you have a car loan at present, you can consider refinancing into a new loan so that the monthly payments can be reduced. Compare your current loan with a potential refinance to see whether it is a viable alternative.