Car Shopping 101: How to Finance a Car

August 13th, 2015 by

Key from the car and the calculator on money.Between researching models and taking test drives, buying a car is an exciting process. It can also be confusing for first-time buyers, thanks to all the financing options and sales jargon sometimes used by car dealers. But financing a car is actually a relatively easy and straightforward process.

First, the buyer needs to know how much he can afford to spend. The buyer’s total living expenses and debt obligations should be subtracted from his total income; the monthly car payment should never exceed the remaining amount. A down payment will reduce the monthly payment or loan terms, but it’s not required by all car dealers.

When it comes to a loan, buyers can usually choose between direct lending and dealership financing. In both cases, the buyer agrees to pay the price of the car, plus a finance charge, over a specified period of time. Using direct lending, the buyer obtains the loan directly from the bank or financial institution. But using dealer financing, the car dealers’ finance officers work with the bank to negotiate loan terms.

The financial institution will review the buyer’s loan application and credit history to determine what, if any, loan terms they want to offer. These loan terms depend on the buyer’s income and credit history, the price of the car and down payment, and the desired length of the contract. Buyers with poor or limited credit may need a cosigner before the loan is approved. The bank will either offer the buyer a loan or deny the application; it’s then up to the buyer to accept the terms, negotiate for better terms, or find a new lender.

Once the buyer and financial institution have agreed on the loan terms, the buyer will have to sign all the loan paperwork agreeing to make the payments on time. At this time you may also have the option to add on products like warranty coverage or gap insurance. Then you are free to drive off the lot!

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