What is Car Finance?

A prospective car buyer has the option to pay in full, lease or finance the purchase. Upfront payments are very high and often open the buyer at risk from having depleted savings in the near future. Leasing has certain benefits and downsides depending on a buyer’s business and tax situation. In contrast to up-front buying and leasing, car financing is very common. A loan for the car purchase is generated. The car buyer makes regular payments on the loan, much as with a home or education loan. 

Extra Features
After agreeing on a price, beware of the sales pitch for extra features and whimsical luxuries. Add-ons may be fun and even useful but they are usually the most profitable for the dealer. This means the dealer has the most incentive to exaggerate and deceive in the final stage of a sale. Some features, such as rustproofing, may be redundant since manufacturers apply rustproofing by default. Other features like alarm systems and VIN etching on windows do have real advantages. However, these add-ons are available from auto shops and stores for much less than what dealerships are likely to charge.

Credit Scores and Zero APR
A buyer’s credit score is critical to what kinds of financing rates are available. Higher credit scores may merit zero percent APR as reward for diligent payments and responsible habits. Beware, though. An interest-free loan is nice, but if the loaned amount is high enough, it may offset trade-in value and rebate discounts. These discounts lower the principal subject to interest. Depending on the exact numbers, which you should take the time to check, a zero-APR deal may be a more expensive choice.

Financing Sources
There are loan alternatives available for people from many walks of life. A perfect credit score is not necessary, though of course it helps. Banks and credit unions typically offer better deals than dealerships. Lending institutions like banks are not invested in maximizing the amount for which you are liable to the same extent as dealerships. Banks are more likely to tell a prospective buyer if they are overpaying for a vehicle. Also, bank financing terms are usually clearer and simpler than car dealership offers. Having an account in good standing with a bank may make them more lenient on interest rate and other loan terms.

Financing Terms
When dealing with car finance, leave nothing to uncertainty. If something is not clear, clarify. There are several key variables to consider besides loan interest rate and monthly amount due. Front-loaded interest means that the first several payments do not dent principal. The loan time frame is important and should be considered in light of a buyer’s financial situation and realistic earning prospects. Prepay or overpay penalties punish those prudent enough to try to get ahead and pay off the car loan early. As with the zero-APR example mentioned earlier, rebate and trade-in value discounts can significantly impact the total effective cost of a car.

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