How Does Car Financing Work?
Congratulations! You’re ready to purchase your next car. Before you can get behind the wheel, you’ll need to create a custom financing plan. We’re here to help you learn the ins and outs of car financing.
So, if you’ve ever asked yourself, “How does car financing work?” keep reading to learn more. To gain a head start on financing your next car through AcceleRide®, download our app and please contact us with any questions.
What Is Car Financing?
Car financing is a way for you to get behind the wheel of your dream car without having to pay the full amount of the vehicle outright. This gives you the ability to make smaller payments over a set period of time.
The actual length of your auto loan is set at the time of purchase. A typical loan length is counted in months and can range from 24 months up to 72 months. In most cases, the longer you extend your loan, the smaller amount you’ll be required to pay each month.
Extending the length of your loan can be a smart strategy, if want to stay within a specific budget. However, there’s something important you need to keep in mind—your interest rate. While you might end up paying less each month, you’ll likely end up paying more interest over the course of your loan.
How Does My Credit Score Affect My Interest Rate?
Typically, like with most loans, you’ll be required to pay interest on this automotive loan. Simply put, interest is the price you pay to borrow money. One of the ways a lender determines a fair interest rate is by taking a look at your current credit score.
Your credit score is like a financial snapshot. It uses information pulled from your credit report to predict how much debt you can safely take on. The higher your score, the more a lender can trust you’ll be able to pay back the auto loan on time.
PRO TIP: Experts say a good credit score when buying a car is anything between 661 and 850. A score above 781 often gives you access to the lowest interest rates.
What Determines My Credit Score?
Credit agencies determine your credit score by looking at several data points, including:
- Payment History: Do you have a strong history of making payments on time and in full? Do you have a record of late payments or credit that’s recently gone into collections?
- Amounts Owed: Mortgages, student loans, and credit card debt are all part of life. While having multiple lines of credit isn’t necessarily a negative, you’ll want to pay close attention to how much debt you’re carrying to ensure you aren’t overextended.
- Credit History: Having a longer history of using credit can be a positive when the time comes to apply for an auto loan. If you’re a younger driver or have a limited credit history, it might be smart to have a co-signer with a strong history of using credit.
- Credit Mix: Credit agencies will look at the types of credit you hold. A strong mix shows that other lending agencies consider you trustworthy to lend money.
- New Credit. Are you making lots of large purchases or applying for multiple lines of credit in a short period of time? These extra moves can affect your score.
What if I’m in the Process of Building Up My Credit?
If your credit score isn’t at or above 661, you can consider having someone co-sign the automotive loan. A co-signer is someone who will take on the responsibility of a loan, if it isn’t paid on time. Knowing two people are responsible for a car loan may help lower your interest rate.
What Other Things Factor Into Car Financing?
Credit score and interest rate impact the total amount you’ll pay over time. However, there are some additional factors that may help lower your overall payments.
Loan Term
Down payment
Trade-in value
Depreciation
Common Financing Terms
There are some terms you’re likely to hear when financing a car. Let’s take a look at some of them:
- Annual percentage rate (APR): The yearly rate for borrowing money from a particular loan institution.
- Lender: The entity from which you borrow money. When it comes to car financing, this could either be the dealership or a bank the dealership works with.
- Preapproval: Some dealerships may provide pre-approved financing that lets you pre-qualify for an automotive loan before you finance a car.
By knowing these basic car financing terms, you’ll be more prepared to secure your automotive loan.
Learn More About Car Financing Today
This quick guide was designed to help you learn more about how car financing works. Of course, there’s still more to learn.
Talk with one of our expert financers to learn more about car financing, your unique requirements, and more today!