How Does Financing a Car Work? A Guide

The average price for a new vehicle was over $37,000 at the end of 2018.

Odds are you don’t have that kind of money sitting around. If your car is on its last leg, or you don’t have a vehicle at all, that statistic might be enough to put you in a panic attack.

Take a deep breath. You don’t need $37,000 in cash to score a reliable vehicle. What you need is vehicle financing!

But how does financing a car work? Keep reading to learn about car financing and get ready to start car shopping.

Secure a Down Payment

The best way to finance a car is with a decent-sized down payment.

Some dealers allow you to purchase a car with no down payment, but this means a larger loan and larger monthly payments. But with decent down payment, you can afford that shiny new car of your dreams — even with your budget!

The easiest way to get extra cash for your purchase is by trading in your old vehicle. Many dealerships take in your old vehicle and then offer a lower price on the new vehicle in return. Keep in mind that dealers will give you less for your used vehicle than if you were to sell the vehicle on your own.

But what do you do if you have a vehicle that even the dealer doesn’t find worth a penny? Believe it or not, there are many businesses that give cash for junk cars.

Seek out a Personal Loan

If you’re looking for the cheapest way to finance a vehicle, seek out a personal loan with a local bank or credit union.

With the right financial history and credit score, you can score a low-interest rate. The bank will preapprove you for a certain loan amount, then you can take this preapproval and find the right vehicle to fit that price.

This takes a little bit more time than financing through a dealer, but it’s often worth the time for the lower monthly payments.

Finance Through a Dealer

You also have the option of financing a car through a dealership.

When you finance through a dealer, you end up paying a higher interest rate for the convenience. This means you can walk into a dealership in the morning and drive away in your vehicle hours later — financing secured. The dealer will run your credit and secure a loan for you with certain banks they work with.

Some dealers even offer “buy here, pay here” financing services. This means the dealership itself is acting as the moneylender. While this often comes with even higher interest rates, this allows people with bad credit or no credit to purchase a new vehicle.

Stop Wondering How Does Financing a Car Work

After reading this article, you can stop wondering how does financing a car work.

Remember that your first focus should be on securing a down payment. Then, decide whether financing through a dealer or with a personal loan is better for your situation.

Need help figuring out how expensive of a vehicle you can actually afford? Visit the Create Your Monthly Budget section right here on our site to find out how much of a car payment you can afford.

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