Financing a car means getting a loan from a bank, dealership, or other lender to pay for the vehicle. It is a way to make the cost of buying a car more manageable by paying it off over time in monthly installments, plus interest, over a predetermined period of time. The most common method of buying a car in the United States is borrowing the money and then paying it off in installments. Over 85% of new cars and half of used cars are financed.
When financing a car, you can either finance the full cost of the vehicle or make a down payment using cash and finance the rest of the purchase. Most auto loans are secured, meaning your car is used as collateral. If you stop making your loan payments, the lender has the right to repossess the car and sell it to get their money back.
There are two primary methods of borrowing money to buy a car: direct and indirect. A direct loan is one that the borrower arranges with a lender directly. Indirect financing is arranged by the car dealership where the car is purchased. Legally, an indirect “loan” is not technically a loan; when a car buyer obtains financing facilitated by a dealership, the buyer and dealer sign a Retail Installment Sales Contract rather than a loan agreement.
Factors that make up a car loan include the loan amount, the annual percentage rate (APR), and the loan term. Interest rates are usually higher when financing a used car as opposed to a new one, so its important to shop around for the best rate. You can get auto loans from banks, credit unions, online auto lenders, and online marketplaces, where you can compare offers from multiple lenders.
In summary, financing a car means getting a loan to purchase the vehicle and paying it off over time in monthly installments, plus interest, over a predetermined period of time. Most auto loans are secured, meaning your car is used as collateral. There are two primary methods of borrowing money to buy a car: direct and indirect. You can get auto loans from banks, credit unions, online auto lenders, and online marketplaces.
