How Does Financing a Car Work? Guide to Financing a Car

How Does Financing a Car Work

You can finance a car if you want to own one without paying the full price for it. This is a better choice for those who want to fully own their vehicles once they have paid off their monthly obligations. So, how does financing a car work? 

A car loan that is taken out and repaid over time is financing. When you get a car loan, you agree to pay it back within a certain time frame, along with interest and any fees. You could significantly reduce your interest and fee costs by shopping around and comparing loan offers.

Keep reading.

What Does It Mean to Finance a Car?

When you finance a car, you use money that a financial institution, such as a bank, has loaned you to pay for the vehicle. Either finance the entire price of a vehicle, or put down a cash deposit and finance the balance. Over a predetermined period of time, you repay the loan in monthly installments plus interest.

The majority of car loans are secured, meaning your vehicle is used as security. The lender has the right to reclaim the vehicle and sell it to recoup their losses if you fail to make your loan payments. Despite the fact that you technically own a financed car (unlike a lease), the lender has the right to repossess the vehicle in the event that you fail to make payments or otherwise break the terms of the loan.

How Does Financing a Car Work? Guide to Financing a Car
How Does Financing a Car Work? Guide to Financing a Car

How Does Financing a Car Work?

In the past, obtaining auto financing frequently required visiting a dealership. The dealer will assist you in securing financing through a lending provider after you’ve chosen your car. This lending provider could be a regional or big-city bank or even the manufacturer finance organization.

You can now buy cars online and even get financing for them. Here are some actions you should perform before doing so.

Check Your Credit Score

Before you start looking for a loan, it’s a good idea to know your credit score. You can use Chase Credit Journey to check your credit score for free. You are also entitled to a free annual credit report from Overlay), the government-authorized website for free credit reports.

Get Prequalified

Having a clear understanding of how much you can borrow makes it easier to finance a car. Chase makes this easy with its prequalification tool. To get an idea of how much of a car loan you might be qualified for, just enter some basic information.

Recognize that this isn’t a request for a loan or a guarantee of funding.

Find the Car You Want

Focus now on the enjoyable part: finding your new car!

You can look for cars in person, or you can shop for a car online with Chase. You can use the tool provided by Chase’s online inventory to find your ideal car by simply responding to a few questions while you’re at home.

In a few markets, Chase Auto offers support through specialized dealerships. A dedicated dealership employee contacts you through this service and walks you through the entire car-buying process.

Apply for Financing

You can begin the financing application process once you locate the vehicle you want at a cost that fits your spending limit.

Lenders of all stripes, including online lenders, will finance your purchase. On Chase’s website, however, you can also submit a loan application directly. Just navigate to the Finance a Car page and click “Apply now” to get started.

How Does Financing a Car Work? Guide to Financing a Car
How Does Financing a Car Work? Guide to Financing a Car

What is the Best Way to Finance a Car?

You’ll need to make some choices regarding the financing of a vehicle based on your personal preferences and financial situation. Here are some things to consider.

Choosing Loan Terms

You might have a choice of several financing options in some circumstances.

Your loan’s term may change over time. A loan term of 36 months or 72 months is an option for you. Your monthly payment may increase the shorter your loan term. Your choice of loan term could be influenced by your credit report and other requirements from your financing institution.

Financing Online Or In-person

Additionally, you have the option of financing your car in person or online. In the past, the majority of people obtained financing for their vehicles by visiting a bank representative in person or by doing so through a dealership.

Major banks now allow you to apply for financing online and work with a network of reliable dealerships when purchasing a car. Your decision, but because of how convenient it is, online financing is becoming more and more common.

How Does Financing a Car Work? Guide to Financing a Car
How Does Financing a Car Work? Guide to Financing a Car

Factors That Make Up a Car Loan

Despite their apparent complexity, car loans are actually quite simple. Before you apply for a loan, you should familiarize yourself with the following terms related to auto loans.

Down Payment

You contribute money toward the purchase of the vehicle as a down payment. Due to the fact that it demonstrates their commitment to the loan, lenders typically favor borrowers who put down a down payment on their car.

Putting more money down on the car can help you get better loan terms, like a lower interest rate, because you can’t borrow a down payment; it must be made in cash you already have.

Annual Percentage Rate (APR)

Essentially, the cost of borrowing money is represented by the annual percentage rate (APR). The lender assigns you an APR based on your credit score, which establishes your creditworthiness when you apply for a loan. For instance, if your credit is bad, the lender might assume that you are more likely to default on your loan and increase the APR to reduce the risk. Good credit scores are typically preferred by lenders, which enables you to be eligible for a lower APR.

Loan Term

The length of time you have to repay the money you borrowed is known as the loan term. The typical loan term is between 36 and 72 months, but some lenders let you borrow money for both shorter and longer durations.

You can slowly pay off the car by selecting a longer loan term, but you’ll also pay more interest. Consider choosing a shorter loan term if you have the money to pay more each month for your car payment. Less interest will be charged, and the equity in the vehicle will grow faster.

How Does Financing a Car Work? Guide to Financing a Car
How Does Financing a Car Work? Guide to Financing a Car

Where Can You Obtain Car Financing?

Auto loans are offered by numerous financial institutions. If you’re considering applying for a loan, take a look at the following locations.

Credit Unions

Credit unions are charitable institutions that provide banking and lending services. A loan from a credit union might enable you to obtain a lower APR if you have excellent credit. It is worthwhile to research local credit unions to see what your options are because, generally speaking, a credit union’s primary goal is to serve its members rather than maximize profit.


Check to see if the bank you currently do business with offers auto loans. If you’re an existing customer and have enough money in your bank accounts, you might be able to get a better deal on an auto loan from a bank, even though they occasionally have stricter requirements and higher interest rates.


Auto dealerships collaborate with a network of lenders to provide auto loans to customers right away. If you don’t have time to apply for a loan before you start looking for a car, these lenders typically have the highest interest rates, but they are a convenient option. Lenders at dealerships may be prepared to work with people who have bad credit in order to complete the sale.

Online Vs. In-person Auto Financing

Several methods exist for obtaining an auto loan. The best way to obtain a favorable APR is to physically go to a bank or credit union. Additionally, one of the dealership’s lenders will accept applications for loans there. The simplest method is probably to apply for auto financing online. You can submit an application from your computer at any time, and many lenders will respond to your request in as little as one business day.

How Does Financing a Car Work? Guide to Financing a Car
How Does Financing a Car Work? Guide to Financing a Car

How Healthy Does Your Credit Need to Be to Finance a Car?

There isn’t a set minimum credit score that everyone must meet in order to finance a car. Every lender has a different minimum credit score requirement and will give different considerations to things like the kind of car you’re buying or your income. For instance, borrowers with recent repossessions or bankruptcies in their credit histories might be eligible for assistance from some lenders.

Still, the average credit score was 718 for new-car loans and 662 for used-car loans in the third quarter of 2019, according to Experian’s State of the Automotive Finance Market report. Additionally, according to the report, only 38% of all auto loans were given to borrowers with credit scores under 660.

It’s generally a good idea to take some time to build your credit before applying for car financing — if you’re able to wait. You might get fewer offers than someone with good credit if you have low credit scores. Additionally, if your loan application is approved, you’ll probably pay a higher interest rate than someone with a higher credit score.

According to a study by Experian, those who had credit scores of 780 or higher paid an average interest rate of 4.01% while those who had credit scores of 500 or lower paid an average rate of 14.3% for their new car loans. The amount of interest you pay over the course of your loan could significantly vary as a result.

Say you received a $20,000 car loan with a five-year term. Here is how your credit may impact the amount of interest you pay.

The 14.3% interest rate on your loan would result in interest payments totaling more than $8,000. Accordingly, your $20,000 car would actually end up costing you more than $28,000.

Is It a Good Idea to Finance a Car?

Your personal financial situation will determine whether financing a car is a good idea. If you pay cash, you could avoid paying interest and any loan fees. But if paying in cash means you’d have to use all of your savings, you might get stuck if a crisis occurs.

Financing might be your only choice if you need a set of wheels but don’t have the money to buy them outright. The amount of debt you have compared to the value of the vehicle you’re purchasing should be taken into consideration. If you don’t put any money down and finance the entire price of the car, you might find that you owe more money than the car is worth after a year or two.

Financing a car could be a way to take advantage of dealership incentives and car manufacturer specials, such as 0% financing or rebates. However, bear in mind that in order to be eligible for these offers, you’ll typically need to obtain a car loan through the finance arm of the automaker.

How Does Financing a Car Work? Guide to Financing a Car
How Does Financing a Car Work? Guide to Financing a Car


Does Financing a Car Mean You Own It?

In the sense that you pay for maintenance, taxes, and registration, you own the financed vehicle. While you repay the loan, the lender typically keeps the actual title.

Additionally, keep in mind that if you stop making payments, the lender may reclaim your vehicle. Until the loan is fully repaid, you do not possess the car in its entirety.

Can You Pay Off a Car Loan Early?

Some lenders charge a penalty for paying off a car loan early. The monthly interest you pay on your loan is how the lender generates revenue. Although there may be an early prepayment fee, repaying a loan early typically means you won’t pay any additional interest.

Is It Smart to Finance a Car Then Pay Off Immediately?

Paying off your car early eliminates your auto loan from the equation. Your DTI will naturally decrease, which makes you eligible for other types of credit. Additionally, it increases your chances of refinancing other loans or consolidating credit card debt at a lower rate.

Does Financing a Car Hurt Your Credit?

When you first get an auto loan, you may see a slight dip in your credit scores because you’re taking on a hefty new debt. Your credit score should improve as soon as you start paying off the loan on time, though. If: You pay all of your bills on time, purchasing a car can improve your credit.

Summary: How Does Financing a Car Work?

When you finance a car, you use money that a bank or other financial institution lends you to pay for the vehicle. You have two payment options: you can either buy the car outright or put down a cash deposit and pay the remaining balance. Over a predetermined period of time, the loan is paid back in monthly installments plus interest.

If you have any questions, please leave a comment. KV Auto tries to give you the best car industry information. Thank you for reading.

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