Most people do not pay cash for their vehicles. Instead, they borrow money to pay the dealership and then pay back the money in installments, usually paying each month. An understanding of this process, known as vehicle financing, can help most people who are interested in getting a new vehicle.
Definition
Financing is giving money to a person, company or agency. The purpose is to fund the purchase -- or in some cases, lease -- of an item or completion of a project. Financing also refers to the monies loaned for this purpose. Vehicle financing refers to giving money to a person, company or agency for the purchase or lease of a vehicle. Vehicle financing also may refer to the funds provided for the vehicle lease or purchase.
Meaning
When a car dealership advertises the vehicles it has for sale, the dealership usually says that "financing is available." This means that the dealership will help you find someone to loan you the money you need to lease or buy the vehicle you want.
Importance
Vehicle financing allows you to lease or buy a vehicle even if you do not have enough money immediately available to cover the costs associated with the lease or purchase. Subsequently, you can get a car when you need it, not just when you've saved up enough to pay the entire cost.
Process
Vehicle financing is essentially a six-step process. First, you gather information about your financial situation, such as your bank statements and pay stubs. Then you fill out an application for the loan and provide it to the dealership. The dealership passes it on to a bank or finance company, which reviews your application and supporting paperwork. The finance company evaluates your debt-to-income ratio, credit score and employment to determine the risk it would be taking by loaning money to you. If all goes well, the financing company approves your loan.
The finance process is not complete until the finance company or bank pays the dealership and all the paperwork is signed. Probably the biggest misconception about this process involves who actually provides the funds; car dealerships are not lenders and therefore do not provide financing, but they may screen applicants to see if it's worth going forward with an application. Car dealerships sometimes mark up the interest rate suggested by the finance company or bank.
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