Financing a car is pretty straightforward. If you have good credit, you can go to any dealership you chose, find the car you want, then apply for a loan. This is the most common approach. With good credit, you provide proof of income and insurance, your loan gets approved, you sign a few papers, then the bank issues a check to the dealership and you drive away. That’s how financing a car through a bank works. The bank or lender keeps a lien on the vehicle until the loan has been paid as agreed. In this way the financed vehicle serves a form of security, and the lender can take ownership of it (repossess it) if the borrower quits making payments.
Financing Terms and Rates of Interest
Most financing terms are for 24-72 months, and the average in the U.S. is right around 60 months. Longer repayment terms lower your monthly payments; however, they simultaneously increase the amount of total interest you pay. For this reason, shorter terms are preferred. Your interest rate itself will be expressed in terms of APR (Annual Percentage Rate), and will be determined by your credit score. Here some average interest rates to finance a new vehicle for 48 months, based on credit score:
- Excellent Credit (720-850): 3.5% APR
- Good Credit (690-720): 5% APR
- Fair Credit (660-690): 7% APR
- Subprime Credit (620-660): 11% APR
- Bad Credit (590-620): 16% APR
- Very Bad Credit (500-590): 17% APR
You will be better off to arrange the financing yourself, because the dealerships get a commission or “kickback” to steer your business to a set of lenders. That usually takes the form of a slightly higher interest rate being offered to you. Obviously, you want to finance at the lowest rate possible, as this translates to less spent overall for your vehicle. In order to work with a finance specialist to pre-arrange your financing, you may want to apply through a service like My Car Lender. They can help guide you through the process, minimizing your APR rate in the process.
Down Payment Requirements
The amount of your down payment also depends on your credit score. Someone with a score above 680 may only need 5-10 percent down or qualify for zero down financing, while someone with a score between 600 and 679 may need 10-15 percent down. Under 600 and you may need as much as 40 percent of the total purchase price as a down payment. The exact amount of the down payment will depend on the lender’s standards, the type of vehicle being financed, and other variables.
Credit Issues and Financing
Overall, financing a car is a fairly simple process if you have sufficient income and a credit score of 700+. What if you have less than stellar credit, though? Then it gets a little more complicated. You can still get financed for a car, but it takes a little more work. You may not be able to work with traditional banks. A credit union or a finance company may be your only options. The basics of getting your loan approved and signing papers are the same, the complications arise in other areas. One difference could be that you may be limited to a set of dealerships that are within the lender’s network. Another may be that you are limited to the amount of money that you will be approved for. A person with a lower credit score is a bigger risk for repayment, so lenders want to minimize their exposure. That means only making loans for cars under a certain amount, or only of a certain age and mileage.
If you have bad credit, you may want to read our post on how to finance a car with bad credit, as you can save yourself a lot of time and money by understanding how the process works.
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