If it’s your first time buying a car, you’ll be pleased to learn that the financing process is very straightforward. We’re here to walk you through the entire thing!
Key Takeaways
- There are three ways to finance a car: lease, purchase, and refinance.
- When it’s time to finance, you need to check your credit score, shop around for the best interest rate, and get prequalified before you sign on the dotted line.
- You can obtain a loan online or in person, depending on your personal preference.
Leasing vs. Buying vs. Refinancing
There are three ways to finance a car: with a lease, loan, or refinancing package.
Financing with a Lease
When you think of financing your vehicle, your first thought is probably of taking out a loan to buy a car. But leasing is also considered financing!
When you lease your car, you only pay for the vehicle’s depreciation, which means you generally have a lower monthly payment than if you were to buy the same vehicle. Your monthly payment will also include leasing fees.
As with most loans, you’ll be required to make a deposit. At the end of your lease, you will return the vehicle to the dealership, because you do not own it. During the course of your lease, you’ll also need to stay within pre-agreed mileage and pay for any damages you do to the vehicle.
Financing with a Loan
To eventually own your car, you can take out a loan to finance your car. Your auto loan consists of three major parts: the total amount you’re borrowing, annual percentage rate or the interest you’ll pay on the loan, and the loan term. The APR on your loan will typically vary according to your credit score. Loan terms typically last between 36 and 72 months.
Refinancing
If your credit improves over time, it’s worth your time to refinance your loan. The higher your credit score, the more likely you are to get a lower APR, which means you’ll spend less on interest throughout the course of your loan! When you refinance, your new lender will pay off your old loan and you’ll make the rest of your payments to your new lender with (hopefully) a lower APR.
Steps to Financing a Car
You can find financing before or after you shop for a car. But if you get preapproved for financing before you shop, you’ll know exactly how much you can spend before you even arrive at the dealership. If you prefer, obtaining financing through the dealership financing department after you find the perfect car is also a very convenient option.
Before you begin the financing process, however, you should check your credit score. Many apps, like Credit Karma, allow you to check your score for free. You can also obtain a free annual credit report from annualcreditreport.com. Knowing where you stand in the credit department will give you a good idea of what to expect from lenders in terms of interest rates. The higher your score, the better offers you’ll get.
Next, get prequalified for lending. Shop around for the best quotes from different lenders. Knowing exactly how big of a loan you can take out will help you manage your budget when you’re at the dealership.
After you find the perfect car, it’s time to put the finishing touches on your loan application. Since you’re already prequalified through your preferred lender, applying for financing is a simple matter of filling out and singing some paperwork.
The Best Way to Finance
The best way to finance a car actually depends on your budget and personal preferences. For example, loan terms can vary between 36 months to 72 months. A shorter term means higher monthly payments, but less interest paid overall. A longer term means a lower monthly payment, though you may end up paying more interest over time.
You can also complete the loan process online, over the phone, or in person. Obtaining your loan online is very convenient. But speaking to a person may help you score a lower interest rate, especially if you’re using a quote from a different lender to negotiate.