Q: What is Car Financing?

December 17, 2013 12:53 PM

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Car financing allows you to pay off the purchase price of a vehicle over a period of time. The period of financing time can vary but usually lasts several years. The main benefit of financing a vehicle purchase is that it allows you to buy a vehicle without having to pay the full purchase price up front. In most instances, you will need to make a down payment, but dealers and car financing companies sometimes make special offers available that do not require a down payment. Car financing arrangements came about because the purchase price of new vehicles was too expensive for individual purchasers to pay for out of pocket. A specialty car financing company or a bank typically provides car financing. Manufacturers also sometimes offer their own financing arrangements.

When financing a car purchase, you will need to determine the interest rate available for the purchase of the vehicle. The single largest factor affecting the interest rate on your financed vehicle purchase is your credit rating. When you apply for financing, the lender will run a credit report. The credit check will produce a credit score report that details information about your credit history. This will provide the lender with an idea regarding the risk they are incurring by loaning money to you. If you are viewed as being a high-risk borrower, you may be charged a higher interest rate. The term of the car loan can also affect the interest rate you are offered. In most instances, the shorter the loan term, the lower the interest rate. Shorter loan terms will also typically produce higher loan payments.

Car financing is available for both new-car and used-car purchases. A loan on a used car will usually have a higher interest rate than a loan on a new car. Your geographic area may also affect the interest rate you are offered. Special incentives are often offered on the purchase of a vehicle. One of the most common incentives is a factory-to-consumer rebate. This is a rebate that the manufacturer offers you when you purchase a specific vehicle. The rebate can typically be applied to the down payment or paid to you in cash.

Another common incentive is a 0-percent interest rate. In order to be eligible for this incentive, you must usually agree to a shorter loan term. This means the payments will be higher than a longer loan term. You may also need to meet a minimum credit score requirement in order to qualify for a 0-percent interest offer. By shopping around for a car financing loan, you may be able to compare different loan terms and interest rates in order to find an offer that best suits your budget. There are several sources available for car financing loans, including retail banks, credit unions, and auto manufacturer financing arms. If you are a homeowner, you may also be able to obtain a home equity loan in order to purchase a vehicle.

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