Understanding Vehicle Financing

CarShopping for a new car is an exciting process, and contrary to popular belief, obtaining financing doesn’t have to ruin the fun. If you take the time to learn about the two basic types of financing, direct lending and dealership financing, before you take your first test drive, you’ll be setting yourself up for a smooth, efficient shopping experience.

After learning about the pros and cons of each type of financing, you will be ready to find the right car with the right financing.

With dealership financing, you make your agreement with the dealership when you want to purchase your vehicle. The dealer works with you to form an agreement on how much you will pay per month and how much you will pay overall, depending on the vehicle you want, your credit history and several other factors. Sometimes the dealer will sell your contract to a financial institution, and that financial institution will collect the payments.

One benefit of dealership financing is it can be convenient. Provided that you are able to find a vehicle you like and financing you like at one dealership, it can be one stop shopping. Furthermore, the fact that dealerships are open long hours and throughout the weekend may be more convenient if your financial institution has limited hours.

The United States Federal Trade Commission (FTC) states that another advantage of working with a dealer is that “dealers sometimes offer manufacturer-sponsored, low-rate or incentive programs to buyers.”

The FTC cautions that, “The programs may be limited to certain vehicles or may have special requirements, like a larger down payment or shorter contract length (36 or 48 months). These programs might require a strong credit rating; check to see if you qualify.”

Your other option for financing is direct lending, which means that you apply for and receive a loan directly from your preferred financial institution. This means that you’re able to work with your trusted community financial institution, a place where you know you will be treated well and have an established relationship. When you find a vehicle that you want, you form a contract with the dealership and use the loan to pay for it.

Another advantage to direct financing is that you have the opportunity to secure financing and determine exactly what you can afford before your emotions get involved with the shopping process, which can help you stay within budget. Furthermore, if you apply for financing at a dealership after deciding on a vehicle, the dealer has the upper hand by knowing that you’re already interested in the vehicle and that you most likely want to make a deal instead of walking away empty handed. When working with your financial institution, you have no pressure to make a deal, and the financial institution knows that you can comparison shop at other institutions, so it has incentive to give you a great deal.

“Any time you get preapproved, you help yourself out,” states Justin Pritchard from About.com Banks/Loans. “You learn what lenders are willing to offer, and you gain negotiating power. Preapproved auto loans, like any other loan, allow you to: know how much you can afford, shop like a cash buyer, and understand the costs you’ll pay.”

When you work with a lender directly, there are no surprises. You walk onto the lot knowing exactly what you can afford, so you don’t waste time looking at cars out of your range. That way, you avoid getting lured by deals that are only applicable to car buyers who qualify for a lower rate than you do.

“You may spend hours looking at vehicles and negotiating with dealers, only to find out that you’re in above your head,” states Pritchard. “The auto buying process can be grueling, so focus your attention on what you know will work.”

Not only will there be no surprises about your qualifications, there will also be transparency when it comes to how much you end up paying.

“Dealers are notorious for trying to focus your attention on the monthly payment,” states Pritchard. “That way, they have room to fiddle with other parts of the deal. When you have a preapproved auto loan, the payment is none of the dealer’s business – so there are no games to play.”

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