Car Financing Simply Explained

By Mike Reitz

Car financing for new and used cars allows car buyers to finance a portion of their car, so they don't have to come up with all the purchase price of the vehicle. The financing program allows a buyer to purchase a car without having all the money upfront.

It's true that financing a car can help build your credit; however, you want to be careful not to take on more debt than you can handle.

Plain Basics

An auto loan is nothing more than a type of installment credit, where you are responsible for making payments each month. The vehicle you purchased is used for collateral for the loan to ensure the bank that their money is protected. In the event you default on the loan (stop making payments) the lender can repossess your car to satisfy the loan.

Straightforward Process

In most cases car financing is a very simple process. Most dealers and lenders can have your financing arranged in less than several hours. Getting an auto loan can improve your credit score and history, by showing that you are responsible and can handle larger debts.

Prime Loan Programs

Buyers who have the best credit scores and history are offered prime auto financing programs and terms. Buyers with excellent credit will qualify for the zero down or no interest loans that manufactures offer on new vehicles. They also qualify for the best interest rates and terms from credit unions and banks.

Near-Prime Loan Programs

People who have less than perfect credit can usually qualify for near-prime loans offered by the manufactures for special rates and terms. They may need to give the lender documentation like proof of income to finalize the loan.

Sub-Prime Loan Programs

People who have poor or little credit scores and history, have little choice but to go with a sub-prime lender. The worse your credit is, the less options you have for car financing. If someone falls in this category a large down payment may be required to offset the risk of the lender. Interest rates are high for this type of loan and can run as much as 25 percent, depending on credit history.

With a sup-prime loan you are limited to what cars you can buy. Not all vehicles will qualify or fit the guide lines for these type of loans. If you fall in this type of loan it is always best to get approved with the lender and then see what vehicle will meet their guide lines. This way you won't be disappointed when you can't qualify for the first car you saw and fell in love with on the lot.