Car Financing Explained in a Nutshell

Before approaching car loan companies, it is a good idea to sit down and determine how much you can afford. Drivers should remember that in addition to monthly payments, you will also need to pay for insurance, as well as gas and periodic repairs and maintenance. All of these costs can add up, and it is important to provide for them in a monthly budget to avoid nasty surprises or a loan which is too big to carry comfortably.

While putting together a loan, it can help to use a car loan calculator to get a rough idea of how things such as the loan amount, the loan length, and the interest rate can change monthly payments and the total cost over time. As a general rule, short term loans are better because borrowers pay less interest. The lower the interest rate, the less costly the used car financing will be.

Once buyers have an idea of their price range, they can approach local lenders. Credit unions are often a great source for used car financing, offering low interest rates to their members, but it pays to shop around and get an idea of the rates offered by several lenders. Borrowers should be aware that the quoted rates usually reflect an “ideal borrower” with a very high credit score, and people with lower credit scores may not qualify for those rates. Rates also vary depending on the age of the car, which is another thing to take into account.

It is also possible to find used car financing online, and through lenders which are not locally based, although the service on this used car financing may not be as good. To avoid a negative impact on their credit scores, borrowers should shop around without actively applying for any loan, and ask only one or two lenders which appear to have good rates and terms for pre-approval on a used car loan. In a pre-approval, the car financing companies will provide the borrower with paperwork indicating how much the lender will give out, and what the interest rate and terms of the loan would be.