What Does It Mean To Finance A Car | Is It Worth It | Expert Guide

When you take out a car loan, schedule a repayment plan, plus interest and any fees, within a set period of time, it is called Car financing.

There are various processes involved in car financing. So, if you are yet to purchase your first car, learning the basics of car financing can help speed up the process.

Car finance, according to wikipedia.org, refers to the various financial products that allow someone to acquire a car, including car loans and leases.

Experian data from Q1 2019 show that, among used vehicles on the road, 85.4% are financed with a loan or lease. It’s never a bad idea to finance a car.

Do you want to finance a car but don’t know how to get started? Read on to learn the step-by-step procedure as well as how much you need as a down payment.

Why Should I Finance A Car?

Customers do not necessarily have large amounts of money lying around to buy a new car. Therefore, they apply for a loan from a bank or financial institution to purchase the car. Based on your income and credit history, the bank sets an interest rate so that monthly payments can be made for the next couple of years.

The repayment time frame for the loan is up to you. You can choose three years but ensure you pay on time. You may decide to pay early but ask your financial institution if there is an early repayment penalty fee.

Until you pay off the loan, the car belongs to the bank. If you decide to sell the car while financing it, you’ll have to make sure the balance of what you owe is covered in the cost of the car.

The cost of a car covers the following:

  • Insurance
  • Gas
  • Maintenance & repairs (oil changes, car washes)
  • Unexpected costs (flat tire, parking tickets)
  • DMV registration fee

Car Financing Basics

If you consider car financing, you have to keep in mind that the cost of a car is beyond monthly payments. There are other added costs that come with having a car that you never knew.

Payment Options

Loan Financing

When financing a car with a loan, you have to consider the following:

  • Loan amount: This is the total amount you’re borrowing to get the car
  • Annual percentage rate(APR): This is the interest rate you pay on your loan and the loan term
  • The amount of time you have to pay back the loan amount

Financing a car with a lease

Leasing a car is another form of car financing that many people don’t know about. When you lease, you only pay for a portion of a vehicle’s cost.

In most states, you may not have to make a down payment, sales tax is only charged on your monthly payments, and you pay a financial rate called a money factor that is similar to the interest rate on loan.

When you lease a car, you generally make a lower monthly payment than if you bought the same car, but you do not get equity on the vehicle that could later translate into trade-in or resale value. You may have the option to purchase the vehicle at the end of the lease term. However, this generally costs more than if you had bought the vehicle first.

At the end of the lease period, if you are interested in keeping the car, you may be able to purchase your vehicle with a lease buyout.

How Much Should You Have for Your Down Payment?

When you finance a car, you’ll need to put down at least a 10 percent cash down payment of the vehicle’s sale price. The higher your down payment amount, the lower the monthly repayment plan. The same applies to a new or used car.

Another important thing to take note of is tax and license. If you don’t pay for this, you can roll it into your monthly payments.

Step-by-Step Procedure For Financing A Car

Here are various steps to take when financing a car:

  • First, learn all the lending terms that are likely to be used when you’re looking to finance a car.
  • Know what your credit score is and why you need it when you are financing a car.
  • Look for a good financing option, preferably one that suits your budget.
  • Compare your preapproved auto loan to an offer from a car dealership.
  • Sign the loan contract and close the deal.
  • Find out what happens after you finalize the deal.

Pros and Cons Of Car Financing

Financing a car can have a positive impact on your life however, if mismanaged, it can cause you financial and emotional stress. So before you consider car financing, take the time to study the various pros and cons.


  • Car financing gives you immediate access to a vehicle
  • Benefit from market competition
  • It’s a way to build your credit profile, assuming you make all the repayments on time.

The Cons of taking out a car loan

  •  Interest and fees: If you miss a repayment or pay off your loan ahead of schedule, you might be charged penalty fees.
  • Depreciating asset
  • Risk of default


Car financing is a great choice to make if you understudy the process carefully. These days, there are dozens of car-buying apps that can link to several hundred different car loan products, so if you do go down that road, you will have a lot of choices.


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  • https://cars.usnews.com/cars-trucks/how-to-finance-a-car
  • https://www.bankofamerica.com/auto-loans/car-buying-process/
  • https://wellkeptwallet.com/finance-a-car-meaning/
  • https://www.ratecity.com.au/car-loans/articles/pros-cons-car-loans


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