Auto finance refers to the various financial products that allow someone to acquire a car, including car loans and leases. Car loans, like other loans such as a mortgage, involve a buyer working with a lender to finance a purchase. With a car loan, the borrower makes monthly loan payments to the lender, such as a credit union, bank, or dealership-associated lender. Auto loans are paid back in fixed installments over a set period of time, and interest is charged on the money borrowed. There are two main types of auto financing: direct lending and dealership financing.

• Direct Lending: In direct lending, the borrower gets a loan directly from a bank, finance company, or credit union. The borrower agrees to pay, over a period of time, the amount financed, plus a finance charge. Once the borrower enters into a contract with a dealership to buy a vehicle, they use the loan from the direct lender to pay for the vehicle.

• Dealership Financing: In dealership financing, the borrower gets financing through the dealership. The borrower and the dealer enter into a contract where the borrower buys a vehicle and agrees to pay, over a period of time, the amount financed plus a finance charge. The dealer may retain the contract, but typically sells it to a bank, finance company, or credit union that services the account and collects the borrowers payments.

Understanding how auto financing works can be tricky, but it is an easy process once you know where to start. It is important to shop around and compare options to get the right loan that could save you hundreds or thousands of dollars over time.