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Car Financing: What You Need to Know

Car financing isn’t just an exciting topic of discussion (okay maybe that’s a reach), it’s also super important. Many people choose to finance when they buy a car. Let’s talk about what exactly auto financing is, why people go that route, and if it’s the right option for you.

More Driving Topics

When deciding where to finance your car, it’s not one-stop shopping- you have options. You can opt for direct lending where you take out a loan from your bank or credit union, you can go with dealer financing which involves financing to vehicle directly with the car dealership, or you can go through a finance company that specializes in the topic. How car financing works is the bank loans you a certain amount of money. You agree to pay that money back in monthly payments over a set amount of time until you pay back the full purchase price (the set amount of time is a maximum, meaning you can pay off the car loan before this set time reaches its full life if you want to).

car financing interest rates

Sounds great, right? Well, there’s a catch. Every month you’ll have to pay a certain amount of interest, which is a set percentage rate of the loan. You might get offered different finance rates and financing options based on your consumer credit score and credit history. For example, if you have bad credit you might get a less appealing month-to-month loan than you might receive if your credit score is stellar.

The chart above shows what you could be paying in interest for a vehicle loan. This means that all the money you’re paying is not going toward paying off the actual auto loan, but to paying the bank as well. For example, on a 60-month $5,000 loan with 10% interest, you would pay $1,374.11 more than the original purchase price to the bank.

For this reason, it’s probably a better option for you to save up and pay cash for a car if you can. Doing this lets you avoid paying those pesky interest fees and you’ll pay less overall. If you can’t afford to save up and pay outright, vehicle financing a car may be a better option for you. Financing can help you build up your credit, but will also cost you more in the long run. Choose wisely and keep in mind the pros and cons of each option.

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