5-Minute Guide to Financing a Car

Purchase the right car, and you’ll spend your time traveling in safety and comfort. Purchase the wrong car, and you could find yourself stuck on the side of the road waiting for a tow truck.

But what happens if your car budget and your car needs aren’t lining up? Or what if you can afford a great car, but wiping out your entire savings account doesn’t feel like the right move?

Instead of buying a car with cash, many people choose to finance.

What Is Car Financing?

When purchasing a car you basically have two options: pay cash, or finance.

Paying cash doesn’t mean you’ll need a stack of bills – a check or debit card usually works fine, too.

Financing a car means taking out a loan to help you cover the cost of the vehicle. You’ll repay the auto loan over a certain period of time, usually 36 to 72 months. These monthly car payments will include not only the principal money loaned to you, but also additional interest and fees.

Is Financing Right for You?

Financing is a relatively common approach to buying a car. Some people opt to finance their car because they don’t have the cash-in-hand to buy it outright. Others may choose financing because they prefer to make monthly payments, rather than clearing out their bank account all at once.

The cost of the vehicle can play a big role in deciding whether or not to finance. If you’re buying an older or used car, there may be less need to take out an auto loan – but it’s always a good idea to consider the purchase holistically. Financing a newer car that’s less likely to need expensive repairs, or a car that better meets your needs for any reason, can potentially offer more value than purchasing a cheaper car outright.

Who Offers Car Financing?

Car financing can be obtained via direct lending, or dealership financing. Direct lending means taking out an auto loan with your credit union or bank, whereas dealership financing means that the car dealer handles the loan particulars and paperwork for you.

The benefit of working with a direct lender is that you can usually get a lower interest rate, and you’ll get access to support and advice from experienced finance professionals throughout the process. Dealership financing usually carries an additional mark-up, so your monthly payment will be higher and you’ll be paying off more money in the long-run. Some dealerships offer financing for people with low credit scores, where a traditional financial institution might not. As always, be sure to read the fine print! A high interest rate or hidden fees can add up quickly.

What’s a Good Financing Deal?

To compare financing deals and choose the best offer, the first point to consider is interest rates. The average Annual Percentage Rate (APR) is around 4.12% APR for a new vehicle and 8.70% APR for a used vehicle. However, rates can vary widely depending on what car you’re purchasing, your credit score, the length of the loan and any special offers you can get from your bank or credit union. HUECU, for example, offers the same low rates on new and used vehicles, starting at 2.99% APR.

Make sure your lender provides interest rates in terms of APR, which includes all associated fees. APR is the best way to measure one financing deal against another.          

Other important questions to ask are:

• Is there are pre-payment penalty? Paying off your loan sooner will mean less interest and fewer payments over the life of the loan, but if there’s a prepayment penalty, you’ll lose this potential benefit.
• What if I buy a different car? Vehicle choice can sometimes affect your APR, including potential discounts for choosing a hybrid or electric vehicle.
• Do missed payments impact my interest rate? Some unscrupulous lenders might penalize late or missed payments by raising your APR to the maximum possible legal rate – so pay attention if terms and conditions seem overly punitive.
• Can I get a lower interest rate? It doesn’t hurt to ask! Lenders will sometimes negotiate car financing offers, or help you understand more about how improving your credit score before taking out a loan could get you a better deal

0% Financing vs. Cash Rebates: Which to Choose?

Some lenders will offer additional incentives to finance your car, including 0% financing or a cash rebate. Beware that these sweeteners are almost always mutually exclusive.

Which should you choose? First, make sure that your credit score and vehicle of choice still qualify you for a 0% financing offer – in all likelihood, you’ll need an excellent score of 780 or above. If you do qualify, check the fine print carefully as 0% loans may include hidden fees that add up fast. A cash rebate, on the other hand, could be useful to cover your down payment on the vehicle, but again, review the terms and conditions with a fine-toothed comb.