What Is Financing a Vehicle?

If you don't have cash to purchase a vehicle, you can borrow money from an auto loan provider to purchase a car, known as financing. Financing allows you to pay back borrowed money for a term between 24 to 84 months. Loans are paid back with interest, however, ranging anywhere from zero to 29 percent.

Credit Application

A vehicle's loan terms are based on a borrower's credit rating. Expect for lenders to review your credit history using the information you provide on your credit application. You'll provide your name, address, Social Security number, date of birth and employment information. Your potential lender will review your past payment history and length of credit. Most lenders require at least two years of employment or address history. Expect your creditor to also verify your employment and ask for proof of income, or your most recent pay stub.

Lenders

Various auto loan providers exist. Credit unions or local banks offer auto loans, as well, that you can visit in person to apply. You can also apply to an online lender that provides auto loans. Dealerships also provide financing; most work with a variety of local and nationally based lenders. Obtaining a preapproval before you set out to shop is beneficial. To obtain one, apply at a lender of your choice to ensure your approval and to secure the terms of your loan. Doing so can help you to shop within your budget.

Term and Rates

Interest rates range from zero percent -- if pursuing a manufacturer offer -- up to 29 percent in some states if using a subprime lender, or a lender who provides loans to borrowers with poor credit. Check the rates of lenders before you decide where to apply; rates are advertised on the lender's website or you can call for details. Rates are adjusted by term. A manufacturer may offer a low rate for a new car but may restrict the loan term. Otherwise, rates up to 60 months are consistent. Loan terms beyond 60 months can increase interest rates.

Insurance Requirements

Budget accordingly for your car loan and car insurance. Most lenders require borrowers to maintain a full-coverage insurance policy until the car loan is paid in full. Full-coverage insurance is the most expensive available, as it covers repairs or replacement of your vehicle even in an at-fault accident. The cost of this insurance policy can easily exceed or match your car payment. Check with an insurance provider to determine policy costs before shopping. This way, you can adjust your vehicle price range to obtain a lower monthly payment, allowing you to budget accordingly for both insurance and car payment.