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Used Car Financing
Buying a used car can be costly. While used cars are generally cheaper than buying a car that is new, many still can cost from several thousand dollars to tens of thousands of dollars. One of the popular ways to purchase a new car is with used car financing.
Generally speaking, used car financing is a secured loan. The car acts as collateral. If you are unable to make payments on the vehicle it is repossessed. However, since used cars generally have a faster depreciation rate than new cars, they generally require substantial down payments for those seeking used car financing.
If you buy a used car from a private seller, usually the only way to receive used car financing is to contact banks on your own. You can take out a used car loan from almost any bank, however terms (the length of the loan, interest rates and qualifications) vary from bank to bank. If you are seeking to purchase a vehicle that is less than several thousand dollars, you may be able to apply for a personal loan. These loans are unsecured- similar to a credit card, however they are generally more difficult to acquire since they are not secured.
If you are buying a used car from a used car lot or larger dealership, you not only will be able to try to acquire lending on your own through private banks, but the dealership may make available special lending options. For instance, many used car dealership offer their own lending. Generally speaking this option is usually more costly (higher interest) than a bank, but for people that have bad credit or prefer the convenience of buying and lending money at the same dealership, it is a viable option.
Generally speaking, used car loans have shorter lengths than new car financing. Expect loan lengths from one year to about 3 years (36 months). In addition, the seller or bank will usually require a down payment in the form of cash. For those buying a car from a used car lot or dealership, you may be able to trade an old vehicle in for a down payment, but for those buying from a personal seller, banks will not accept a trade-in. You will either have to come up with a cash down payment or sell an old vehicle on your own for cash first to give to your bank as a down payment.
Because used car financing can be more costly and less convenient, many buyers opt instead to buy a new car. Make sure you weigh all the information regarding financing and research your options before taking out a used car loan.
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New Car Financing
For millions of car shoppers, the easiest way to purchase a vehicle is with new car financing. New car financing is a multi-billion dollar industry helping many individuals and families drive the vehicle of their dreams. With cars, trucks and SUV’s costing tens of thousands of dollars, most car shoppers would be unable to purchase these vehicles without new car financing.
Two Types of New Car Financing
There are generally two types of new car financing. The first is to receive financing direct from the car manufacturer you are buying. For instance, if you are buying a GM vehicle, you can usually receive new car financing from GMAC (GM’s lending service). Another option is to go through a private bank or credit union. In most cases a car dealership will put you in touch with a variety of banks that may offer new car financing or you can personally contact banks on your own for financing. Some individuals that belong to a credit union choose to request financing (usually at a lower interest rate) from their credit union.
The Basics of New Car Financing
There are a few basic aspects of new car financing. They include; down payment (or trade in value), term of loan and monthly payment.
Down Payment
Since new car financing is almost always in the form of a secured loan, the car you buy is used as collateral in the case that you are unable to pay the loan off. Since cars lose their value the moment you drive it off the lot, in order to reduce the risk of the loan, many banks and lending agencies require that you place a down payment for the vehicle. A down payment can be in the form of cash or it can be in the form of a trade-in. Trade-ins are a popular way to gain a down payment when you choose to get rid of your old car or don’t have the cash to put down. Since most individuals already own a car, using their old vehicle as a trade-in is practical. Trade-in values depend on a variety of factors, however, type of car, age, mileage, condition, etc play an important role. The amount of a trade-in vehicle is usually set by the dealer, however you can get receive a ball park figure by purchasing a blue book or going online to learn its value before hand.
Term of Loan
The term of the loan is the length that it takes to pay off new car financing. Most vehicles have terms that range from 12 months to 60 months. The most popular terms are 48 months (4 years) and 60 months (5 years). Obviously, the longer the length, the lower the monthly payments, however the downside is that interest costs will be higher.
Monthly Payment
Monthly payments is the amount that new car financing costs each month. They depend on a variety of factors including: total cost of vehicle, down payment, term length and interest rates.
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Car Financing
For most individuals, the purchase of a car is the second biggest purchase-only to a home. If you are in the market to purchase a car, chances are that you will require some type of car financing. Car financing can differ in a variety of ways. However, here are the basics that many people looking to purchase a car will usually come up against.
Car Financing are Secured Loans
First off, it is important to note that the overwhelming majority of car financing loans are secured loans. This means that if you default (are unable to pay) on the loan, the car is the collateral and will be repossessed. Since most vehicles depreciate as soon as they are driven off the lot, most banks require a down payment to offset any risks associated with lending money.
Car Financing Through the Dealership
New car dealerships want to sell as many new cars as possible. This means that they will work aggressively to find financing for the vehicles they sell. Since most buyers require some kind of financing to purchase a vehicle, a new car dealership usually has it’s own lending banks such as General Motors (GMAC) or work closely with a variety of banks to find financing at attractive rates for its customers. It should be noted that since most car buyers require financing for buying a new vehicle, many customers don’t negotiate the final price of a vehicle, but rather terms of financing.
Generally speaking, car financing through the dealership when buying a new car will take into account three important aspects of financing. They include: down payment or trade in, length of financing and monthly payment.
Down Payment or Trade in
It is important to note that most dealerships require some sort of down payment when buying a vehicle to reduce the risk. As mentioned above, once you drive off the lot, your vehicle depreciates in value, if you aren’t able to make payments and the bank repossessed the vehicle, the bank would probably lose money. To offset this balance, a down payment is usually necessary. A down payment usually comes in the form of either cash paid upfront or a trade in. If you are buying a vehicle, it is realistic that the bank would ask you to put down money. This amount of money depends on a number of factors including the buyer’s credit history, age, yearly income, savings, if the buyer was a past customer, etc.
However, while cash down is always accepted, many dealerships find that an easier way for many buyers to place some kind of down payment is to trade in their old vehicle. Since many buyers already have a car that they will no longer require, their old car’s value can be used as a down payment. The value of the vehicle usually depends on the book value and condition, along with a host of other factors. Unfortunately there is no way to determine the exact amount until you have spoken with the dealership.
Length of Financing
Car purchases can be quite expensive and many buyers usually don’t have thousands upon thousands of dollars lying around to buy a vehicle outright. Instead, a payment plan is usually attractive. For the vast majority of car financing purchases, a car loan will be taken out. Interest is charged by the bank which can be as low as 0% all the way up to 30%, however an APR (annual percentage rate) of about 12% or less is usually the norm. The upside of long term financing is that the longer the term of the loan (usually from 12 to 60 months), the less your monthly payment will be. The downside is that the longer term of your loan, the more interest you will pay.
Amount of Monthly Payment
The amount of your monthly payment depends on a lot of variables including the vehicle’s total cost, the amount of the down payment or trade in, the amount of interest charged and the length of the loan.
Car Financing of Used Vehicles
Car financing of used vehicles is very similar to new vehicles, except for one important factor. While new vehicles can usually be financed through car dealership banks (GMAC), used cars are almost universally financed by private banks. There are two major downsides. The first is that finding financing for a used car is less convenient since you may have to contact banks on your own or the used car dealership will have to contact several banks instead of automatically going through the manufacturers lending service. The second downside is that for the most part, used car financing is more expensive in terms of interest rates. Generally speaking, you will have to pay a higher interest rate and pay off your vehicle in a shorter period of time than with new car financing.
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