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Is Financing a Car a Scam? Do You Really Need It? Read to Know!

  • Auto Refinance
  • Natasha Young
  • 10 minutes

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So, you’ve decided to purchase your dream car. Let’s say you’ve negotiated for the best deal and eventually agreed on a price you can live with — is it time to let out a sigh of relief? Actually, no. This is exactly when you should be thinking about financing your car. 

What does it mean by financing a car? 

Financing a car means getting a loan to pay the cost of the car upfront. Then, you have to pay back that loan every month until it’s paid off completely. Here are a set of things to keep in mind when applying for a car loan: 

financing a car

Purchase price and fees

The agreed-upon price of the car is the purchase price. Most of the time, a dealer sets the price, but it can be negotiated. In addition to this price, you will also have to pay taxes and other fees, which will vary by state and car dealership. All of these add up to the price of the car as a whole. 

Down payment

Most auto loans won’t cover the full cost of your car, so you’ll need to pay a down payment. Usually, the down payment is equal to 20% of the total cost of the car. The less you need to borrow to buy a car; the bigger your down payment should be. Since you will be charged interest on the rest, the more you can pay as a down payment, the better. 

Annual Percentage Rate (APR) And Interest rates

 The annual percentage rate (APR) and the interest rate show how much it costs to borrow money from a finance company. There are two different ways to pay for a car. The interest rate is how much it will cost to borrow the money for the loan if there are no other fees. Since fees are part of the APR, it is a little bit higher. Most reputable lenders will show the APR on their websites, which includes interest and fees. 

Financing term length

Your financing term is how long it will take to pay off your auto loan if you make all your monthly payments on time. The longer the term of your loan, the more you will pay in the end. This is because interest will keep increasing if you take longer to pay the loan. So, try to repay your loan as soon as you can. 

financing a car

How does car financing work? 

To get a loan for a car, you have to fill out a credit application with information like your Social Security number and how much money you make. Then, the lender will let you know if you are approved and, if you are, will tell you about your interest rate and loan terms.  

After the sale is finalized, you set up payments through your bank to pay back the lender throughout the loan. For example, when you finance a car, you get the money you need to buy it from a dealership. In return, you pay the lender interest and fees over several months.  

Your monthly car loan payment is based on your loan amount (the price of the car minus any down payment and trade-in), your annual percentage rate (APR), and the length of your loan. The APR is very crucial when you plan to take an auto loan. It changes how much you’ll have to pay for the car. Your interest rate is dependent on many things, such as your credit score, loan length, and your choice of getting a new or used car. 

Once you’ve paid the loan in full, your lender will send a lien release document to the state transportation agency. This depends on the state laws. The title of the car will then be changed and given to you. 

Who offers car financing? 

Banks, online lenders, finance companies, credit unions, and even some car dealerships offer car loans. Financing via a credit union or bank may be cheaper than getting a loan through a dealership. This is because dealers may raise interest rates to compensate for the time they spent setting up your loan.  

Some dealerships even offer their financing. Car dealerships that offer in-house financing or “buy-here, pay-here” financing may charge much higher interest rates than other lenders. 

What credit score do I need to finance a car? 

According to Experian‘s Quarter one 2022 State of the Auto Finance Market, 62% of borrowers had credit scores of 601 or above, and just under 20% had scores of 500 or below. Borrowers had scores all over the board, but their interest rates differed. 

Credit Score  Average New Car APR  Average Used Car APR 
781 to 850  2.40%  3.71% 
661 to 780  3.56%  5.58% 
601 to 660  6.70%  10.48% 
501 to 600  10.87%  17.29% 
300 to 500  14.76%  20.99% 

Alternative ways to auto finance 

Leasing a car

If you lease a car, you will pay a monthly fee that is comparatively less than what you would pay for an auto loan. But when the lease is up, you must return the car and be charged for any extra damage. If you consider buying the car at the end of a lease, a lease buyout is an option. 

Peer-to-peer lending

You could ask a person for a loan instead of a loan company. Someone you know may be able to lend you money at a better rate than auto lenders (or with no interest at all). 

Paying cash

If you can avoid making a monthly car payment, it’s best to pay cash for the car. Cash payments are the most cost-effective way to buy a car in the long run, but most people don’t have enough money to do this. 

financing a car

Tips for financing a car 

Figure out how much you can pay ahead of time 

Know how much you can afford to finance before deciding which car to buy. Then, consider how much you can afford to pay each month and work backward. 

Cars lose value over time, so if you take out a loan you can’t pay back, you’ll soon be in debt. After a few years, it’s not unusual for a car’s value to be less than how much you still owe on a loan. 

Check your credit rating 

Most of your interest rate is based on your credit score. At least once a year, you can get a free copy of your credit report. 

If case of bad credit, you might need an auto loan for people with bad credit. If your credit score is low, having a cosigner with good credit can help you get a better APR. 

Cut down on finance costs 

You should focus on paying as little as possible on top of the cost of the car. This means you should look for a loan with a low APR and a short payment term.  

Also, try to lower the amount you have to borrow by putting down as much money as possible. The standard down payment is 20%, but if you can pay more upfront, you will pay less in the long run. 

Compare car financing offers 

Before you go to the dealership, it’s a good idea to look at different auto loan offers. When doing this, ensure you only ask for loan offers from lenders who offer pre-qualification without a hard credit check.  

Your credit score will steep down if you agree to a hard credit check, so don’t do one unless you are ready to close on a loan offer. 

Prequalify for a car loan   

Once you’ve decided where your loan will come from, look for lenders who offer pre-qualification. This means that the lender does a soft check of your credit report, which doesn’t show up on your credit report as a credit inquiry. 

Most pre-qualifications are good for 30 to 45 days, which gives you time to compare different lenders and shop around. After that, most pre-qualifications are correct, but if a lender pulls your full credit report, they may turn down your application. 

Getting pre-approved for a car loan gives you negotiating power 

There is a benefit to getting a loan before going to a dealership to pick out a car. After a full credit application and loan approval, you can get pre-approval from an online lender. In a pre-approval letter from a lender, the exact amount you’re approved for will be written out. 

When you go shopping, you can take this letter to a dealership. It can help you get a better deal because the dealer will know you can finance up to that amount. Your credit won’t have to be checked by the dealer. As a buyer, you have more negotiating power because it’s easier for them, and they know you’re serious. 

Avoid “Buy Here, Pay Here” dealerships 

Buy here, pay here (BHPH) dealerships are places where you can buy a car and get a loan on the spot. In addition, BHPH dealers offer credit, which is different from regular dealers, who connect customers with separate lenders. 

At first, this might look like a good deal. You can choose a car and get financing at the same place, and many Buy Here Pay Here (BHPH) dealers work with people who have bad credit or no credit. But we think you should avoid these dealers. 

If you use a “buy here, pay here” dealer, you can expect to pay the highest interest rate in your state. This is because these dealerships don’t work with many people with good credit, and those who borrow from them are more likely to miss payments or not pay. This makes the rates go up for everyone who borrows from the dealer. 

Is it a good idea to finance a car? 

If you don’t have enough cash on hand to pay for a car in full, financing it might be a good idea. You should have enough money to buy a new car without taking out a loan.  

Unless your annual percentage rate (APR) is 0%, which is rare, buying a car with cash is cheaper in the long run. Of course, many people can’t or won’t be able to do this. Financing may be the only way to buy a car if you need one quickly and don’t have enough money. Consider buying a car with a loan if:  

  • When you are in need of a car but don’t have enough cash to pay for it in full. 
  • You want a car but can’t pay for it all at once. You can plan for the monthly cost of your payments, though.

Read : What Is The Best Way To Finance A Car?

When financing a car, who has the title? 

When you get a car loan, the lienholder or lender is the person who holds the title to your car. For a purchase loan, you won’t own your car until the end of the loan term. Leasing a car means you never get ownership of it. Instead, the dealership where you bought it keeps the title.

Read : What Happens to a Vehicle When the Owner Dies?

Does financing a car build credit? 

If you pay back an auto loan on time, it will help your credit score. Your credit score boots up as you meet all of the factors that go into it, like making payments on time, having a long credit history, getting new credit, and having a mix of credit. 

Read : What’s the Highest Credit Score and How to Achieve it?

financing a car


When you finance a car, you can buy one even if you don’t have enough money. There are various ways to pay for a car if you don’t have cash on hand, and if purchase loans don’t work for you, there are many other options. We suggest you look around and compare as many car financing options as possible to find the best deal. 

Here’s more info on top-rated airport parkingthe best parking spots in your city, the most affordable auto insurance for your car, easy auto refinance, and top-rated car washes near you.


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