Auto Financing Basics

July 11th, 2016 by

University Mitsubishi Auto Financing

After days of research and window shopping you did it. You found the car you’ve been searching for. It’s beautiful, and yet it has one grueling, deal breaking trait – the price, and that’s why car financing and obtaining auto loans are common practice today.

What is Car Financing?

Car financing is the term used when getting a loan, either from a bank or credit union, to pay for a vehicle. When applying for a car loan, there are a couple of financing basics you need to know: the amount of money you need to borrow for the car; the term of the loan; your credit score; the monthly payment you can afford; and how to apply for a loan.

Amount You Need

More isn’t always better. If a car is priced at $30,000 and you qualify for a $40,000 loan, it may sound nice to have an extra $10k. However, that could hurt you in the long run, because the more you borrow, the more you owe due to interest.

Current auto loan interest rates average between 4-5% of the total loan, but this varies based on a number of factors. Given today’s interest rates, a 5-year $30,000 loan at 5% will cost $2,343 in interest, making the vehicle a $32,430 purchase. Take into account any taxes, fees, and expenses you may incur with the car and that extra 10k shrinks fast. Furthermore, most banks and credit unions will not give you an offer without knowing what the amount of money requested is for i.e. credit financing, student debt, or auto financing. They may offer you more than you need, but you should only borrow what you need and not what you can get.

Term of a Loan

The term of a car loan is basically how long you have to pay back the lender. For instance, if you sign up for a five-year term, then in five years you’re expected to pay the loan back in full. How much you have to pay each month will depend on your amount being financed and your interest rate, and your interest rate will rely on your credit score, as well as some other factors.

Credit Score

Everyone’s credit score lies somewhere between 300 and 850, and the higher the better. If you’ve never held a credit card, you may not have any credit, and that will be a problem.

There are other ways to build credit, but most of it comes down to credit and/or debt. If you have been building credit, paid off debt, and pay your bills on time then you probably have good credit, but if you’re unsure, you can use a service like Credit Karma or FICO to find out your credit score. Your interest rate and therefore, payments, will be dependant on your FICO/credit score in combination with some other factors.

How Much You Can Afford

This all comes down to your yearly salary and your budget.

-How much do you spend on a given month? How much do you make?

-Every three months?

-How much do you save?

You need to know this amount before getting a loan, because if your monthly payment is more than you have left over every month, bills are going to pile up fast. Once you have your credit score and know how much money you save every month, finding the best monthly payment for you depends on who you go to for a car loan.

Applying for a Car Loan

When researching financing for a car and applying for a car loan, you have two options: direct lending, through a bank, credit union, or other type of financing organization; or dealership financing. You have to enter a contract to pay the loan with either option, but the charges will vary from one to the other. There are also some benefits that you get with each.

– When going through a bank or credit union, you can compare terms and payment across multiple organizations and pick which better suits your needs and financial limits. Plus, by going with financing beforehand, this gives you a better idea of the price range you’re looking at when car shopping.

– When going through a dealership, it’s convenient and all of the financing is done where you bought the car. It’s simplified. You also get multiple options, but only the options the dealership offers. You can’t really “shop around” if going through the same dealership you’re getting the car from.


Along with all of this, negotiating a payment based on what you can afford each month and your interest rate is very important. It’s impertinent you don’t put all your cards on the table. You may know your budget, but you don’t want to let the salesman know that number. Start lower for negotiating a lower price. With your credit score, you can already get an idea of the interest rate and amount you may need to pay each month. Keep it in mind when negotiating your monthly payments, and try to decrease it while negotiating with the bank, credit union, or auto finance manager.
These are some of the basics of auto financing and we didn’t cover it all in-depth. These are the footnotes of a larger process. You can’t just dive into this stuff, it takes time and planning. Most importantly, it takes research, and here we’ve provided the basics you should know and look up to get started on for financing your car.

Photo Source: Shutterstock; Photo Copyright:  Sean K
Posted in car buying