July 30, 2019

How to Finance a Car

More than 43% of Americans finance their car. How can you get approved for a car loan? Keep reading to find out.

Where to Begin

Looking for a new (or new used) car? If you have great credit, financing can be a great way to afford it. Read on to learn how to get started.

Check Your Credit History
You can request a free copy of your full credit history report from Equifax, Experian, and TransUnion once per year. Try to fix negative credit issues before car shopping.

Check Your Credit Score
Your credit card companies or bank may offer free access to your credit score. The number will be an estimate within a few points of what financing companies will see.

  • If your credit score is at least 700, a car dealership may get you the best financing deal. You may qualify for advertised 0% or low APR financing options.

  • If you do not have an optimal credit history, you may want to look for financing through a bank.

Save for a Down Payment
Ideally, a 20% down payment helps you get a lower interest rate and better terms on the loan. You can also use the value of a trade-in to serve as your down payment.

What's the Minimum Down Payment on a Car?
Though banks and lenders have a different minimum requirements, a 10% down payment is usually necessary to get the best financing terms.

Stay in Your Budget
Focus on the size and features you need in a car. Make a list of the "must haves" to help you choose the vehicle you can afford.

Secure Your Financing
If you choose financing from an outside bank, you'll need to secure the financing before you shop for a car. Once you have final approval, you can negotiate the price of the car at the dealership.

Although a lower payment may seem more attractive, choosing a longer term means more interest and a higher total cost for the car.

Try limiting your options to a shorter term and keep your focus on the total cost of the car, not the lower monthly payment.

Financing Options

You have several financing options. Keep reading to find the best fit for you.

Dealership financing
Dealers can provide financing options from numerous lenders. They often have low—or even 0%—APR financing options available directly from the manufacturer. You can negotiate your car's price and the loan terms all at once.

Do dealerships prefer you to finance a car or pay cash?
It's a common myth that dealerships prefer cash buyers. When buyers secure financing through the dealership, the dealership often makes more money on the car.

Bank financing
If you have less than perfect credit, you can explore options with local banks. Starting with your own bank may give you a better chance of securing the financing terms you need.

Online lenders
If you have credit issues or don't have a relationship with a local bank, online lenders offer a great alternative. You can apply directly with online banks or with online marketplaces that use one application to match you up with several lenders based on your qualifications.

Credit unions
If you belong to a credit union, check out their options for a car loan. They may offer attractive terms and similar interest rates to the dealership.

Watch Out for Taxes and Fees
When you finance a car, taxes, registration, and document fees are often included in the loan. This causes your car loan to be higher than what your vehicle is worth.

Remember, you can lose as much as 10% of your vehicle's value right when you drive it off the lot. To avoid paying interest on sales tax and miscellaneous fees, try paying these fees in cash.

Bank vs Dealership Financing

The dealership may be able to give you 0% financing, but your bank may be able to give you a larger loan. Which option is better for you? We compare both below.

Pros of Dealership Financing

  • Convenience
    You can test drive cars, negotiate rates, apply for financing, and drive away all in one visit.

  • Attractive Promotions
    You'll typically only find 0% APR or cash-back rebate options at a dealership.

  • Many Financing Options
    Dealers operate as a broker for numerous lending companies, which may give you many options to choose from.

Cons of Dealership Financing

  • Higher Interest Rates
    Dealerships typically charge a marked-up interest rate from what banks generally charge so that they can make extra money on your car purchase.

  • Unknown Financial Institutions
    You don't necessarily know which bank is financing your car until you sign the papers. This doesn't provide enough time to do research on the quality of the lender.

Pros of Bank Financing

  • Better Deals
    Working with a bank that you already use may make it easier to secure attractive rates and terms.

  • Lenient Late/Missed Payment Options
    If you have a pre-existing relationship with your bank, you may have more options to manage any late or missed payments.

  • Pre-approval
    Unlike dealership financing, you can secure bank financing before you even shop for a car. Getting pre-approved allows you know exactly what you can afford and which cars to shop for.

Cons of Bank Financing

  • No Negotiations
    You may have a harder time negotiating the interest rate or term length with a bank. They generally offer programs with fixed rates and terms.

  • Inconvenient
    Financing from your bank is done either in person or online. You'll need the financing to be completed before purchasing a car, so timing of the purchase can be impacted.

Can you give a car back to the financing company?
Giving back your car, or voluntary repossession, is an option if you can't make your payments. While you won't get your money back and your credit score will suffer, it shows responsibility on your part to work things out with the lending institution.

What Documents Do You Need?

In order to qualify for a car loan, you must prove your income, assets, credit history, and residency. At a minimum, you'll need the following:

Credit History
When you complete the loan application, you allow the dealership or bank to check your credit. They will then use this information to determine your debt-to-income ratio and to see if you qualify for the loan.

Income Documents
If you work for a company, a paystub showing your YTD income may suffice. Some lenders will also require your employer's contact information to verify your employment.

If you own your own business, you'll need to provide tax returns for the last two years to prove your income.

Proof of Identity
Today's guidelines require that you provide your driver's license, a copy of a utility bill showing your current address, and 2 months of bank statements to prove your identity.

Proof of Residence
Typically, the documents you provide for proof of identity also fulfill the proof of residence requirements. A copy of a utility bill, your driver's license, or other state-issued ID will be sufficient.

Proof of Insurance
You need car insurance to drive the car off the lot. A copy of the insurance card and proof of minimum coverage will typically suffice.

Paperwork for Your Trade-in
The dealer will need a copy of the registration and title as proof that you own the car you are trading in. When you do trade in the car, the title is transferred over to the dealer.


How long does it take to finance a car?
If you go through a dealership, you can expect to spend between two and six hours dealing with the financing.

If you finance through a bank, it could take between a few days and a few weeks to secure financing. Sometimes you can secure a pre-approval online in a few minutes and close the loan by the next business day.

To make the process quicker, be prepared with the above documents, check your credit score, and ask about the lender's turnaround times.

Can I finance a car with a low credit score?
There are car loans available online that are best suited for those with low credit scores. Online financing companies such as Auto Credit Express and Capital One Auto Financing offer car loans to borrowers with credit scores as low as 500.

If you take out a car loan with an exceptionally high interest rate or unreasonable terms, you may be able to refinance for a lower rate in the future after increasing your credit score and lowering your debt.

Can I finance a car while unemployed?
If you can prove that you can afford the loan payments using other income sources, you do not necessarily need to have a job. Some of the most common types of income unemployed borrowers use include:

  • Child support
  • Alimony
  • Social Security or Pension Benefits
  • Retirement income
  • Investment Income

Unemployed borrowers typically need a down payment of at least 30% to obtain approval.

Can I finance a car out of state?
Yes. However, each state differs in their sales tax requirements. If you buy in a state that has reciprocal agreements with your state, the dealer will charge your state's sales tax at the time of purchase.

If there isn't a reciprocal agreement, you'll owe the sales tax when you register the car in your home state. This could mean additional costs of a few thousand dollars depending on the vehicle, so don't overlook this requirement.

Can I finance a car at 18 years old?
Because most 18-year-olds have little to no credit history, you'll need other ways to prove you can afford the loan. Try to have a large down payment (more than 20%), proof of stable income, and a willing cosigner, if possible.

You can refinance to remove the cosigner from the loan in the future but for now, he/she can help you get the car loan you need and will also help boost your credit.

Can I finance a car with no credit?
If you can prove that you have stable income, a large down payment, and a cosigner, your chances of securing a car with no credit increase.

If you can't find a cosigner, using a "buy here pay here" dealer may offer you a few more options. However, these loans will typically cost more than your traditional dealer/lender.

Will I own the car when financing?
Technically, you don't own the car until the loan is paid in full. Once the lender has full repayment, they remove their lien from the title, making you the sole owner of the vehicle.

Does financing a car cost more?
The length of the loan term and interest rate charged can cause you to pay more than the cost of the car. For example, a financed $30,000 car could cost a total of $35,000 at the end of your loan term.

Is gap insurance required?
Gap insurance covers the gap between your car's depreciated value and your loan amount should you total your car before the loan is paid off. If you make a large enough down payment and take the shortest term possible, you should be able to avoid gap insurance.

Some car insurance companies offer a form of gap insurance as an add-on benefit to your existing policy. Speak with your agent to see if they have a more affordable option.

Bottom Line

Before you finance a car, be sure to consider your options. Going straight to the dealer may be the most convenient choice, but it's not necessarily the best one.

More from CreditDonkey:

How To Finance A Used Car

Financing a New Car

How Much Does A Car Cost


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