Vehicle Finance Information

Next to your home, your vehicle is one of the most expensive things you'll ever buy. Most new vehicles are priced above what buyers can afford to pay in cash, which means there's an ongoing need for vehicle financing opportunities. When you finance a vehicle, you pay more in the end, but an auto loan can also be part of responsible financial behavior.

Process

To finance a vehicle you need to apply for a loan through a bank or private commercial lender. Car dealerships have working relationships with lenders that operate locally and provide loans specifically tailored for buying new and used cars. Auto loans are identified by APR ratings, which refer to the annual percentage rate that you'll pay in interest.

Since your auto loans arrives as a monthly bill, you can determine how much you'll pay in interest by dividing your APR by 12. For example, a 6-percent APR loan will charge 0.5 percent of the total balance as interest. If you owe $20,000, this equates to $100 per month. Most auto loans last for five years, but loan offers and terms vary from one lender to another.

Eligibility

Lenders don't offer the same auto financing to all buyers. Instead, buyers with a higher credit rating, who are more likely to be able to pay the loan back on time, receive the lowest APRs, while buyers with poor credit may need to pay more in interest. Lenders also consider a buyer's income, debt level and the cost of the vehicle in computing a loan offer. In some cases, lenders will work with dealers to offer special low APRs only on specific models or certified used vehicles as a means of attracting buyers' attention.

Tips

You can save money when you finance a vehicle in a number of ways. A larger down payment will not only reduce the amount you have to pay back but also the amount that you'll pay interest on. If a dealer offers to defer fees or reduce your down payment, remember that this amount will add to your loan's principal and cost you more in interest. Instead of negotiating for a monthly price, negotiate the dealer's lowest sale price for the vehicle. Then make the biggest down payment you can comfortably afford.

Alternatives

Not every vehicle purchase needs to be an occasion to go into debt. If you can afford a down payment of several thousand dollars, consider a used vehicle. Some used vehicles come with limited dealer warranties or certification from the automaker that reduce your liability if anything goes wrong shortly after you make the purchase. A used car may also save you money on insurance since it will cost less to replace in the event of an accident.

An auto lease is another option. A lease is essentially a long-term rental, usually with a three-year term and a monthly payment lower than the monthly payment to finance a car. At the end of the lease term, however, you must surrender your vehicle or pay a predetermined buyout payment.