What does car financing mean?

When you want to own a car, but your savings are not enough, you can finance your car. Financing a car means taking out a car loan and paying it back overtime. You could finance both a new vehicle or a used one. A financial institution loans you enough money to purchase your car, however, charges interest on the amount you borrowed. Usually you repay your loan by making regular payments every month or every two weeks (repaying the borrowed amount + the interest). 

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Financing a car is a good solution for someone who is able to make regular payments for a prolonged period of time (4-5 years). If you do not think you can maintain making those payments, for various reasons, car financing is not for you. It is then better to save up and pay the total amount at once (this may mean you would have to go with a more affordable vehicle).

How to finance a car?

So, you have decided that you want to go with car financing after all. You can finance your car through a bank or through a dealership. You can first go to a bank and find out how much they can lend you. They will most likely ask for a few of your latest paystubs or an annual tax return. They will also check your credit history and credit score. Then, you will receive a quote and with that quote you can decide what type of vehicle you can afford to purchase. When you come to the dealership with a prepared quote from the bank, the salesperson will less likely try to convince you to buy something above your bank loan quote limit. 

Different financial institutions offer different car financing terms. 

Interest rates and payment conditions may differ significantly. This is why it is always a good idea to get quotes from a number of financial institutions and, possibly, dealerships.

You can put down some down payment, which will decrease the amount you would need to loan. If you already own a car, you can trade it in (however, you will definitely get more money if you just independently sell your old car).

How are car loan payments calculated?

There are a number of online car loan calculators that you could use to determine what your monthly or bi-weekly payments would be. 

You have decided to get a car that costs $15,000. 

The bank offers you the following financing conditions: 5 years (60 months) at 5.9% annual interest rate, $0 down payment and no trade in. 

If you decide to go with this offer, the total amount you are expected to repay after 5 years would be $19,620. Your monthly payments would be $327. This means that over 5 years you would have paid $4,620 in interest – that is a lot of money!

In the meantime, also keep in mind that your vehicle will be depreciating over the same 5 years – meaning if you decide to sell it, with each year passing you will get less money for it.

Financing a car is not a complicated process, but like any financial decision it should be well thought over and all options and risks should be considered.