What Does Financing a Car Mean and How Does It Work? – Credible

Financing a car involves making a down payment and then taking out a loan that allows you to pay off the vehicle over a set period of time.
Jacqueline DeMarco

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Buying a car with cash can be quite challenging, which is why financing a car purchase is so common. When you finance a car, you make a down payment and then take out an auto loan that allows you to pay off the vehicle over a set period of time. You’ll make monthly payments, with interest.
You’ll want to keep a few factors in mind, including the loan term, any fees, and the monthly payment amount.
Learn more about how financing a car works, where to find loans to buy a car, and credit score requirements for an auto loan:

When you finance a car, a car dealership, lender, or other financial institution loans you money to buy the vehicle. You can take out an auto loan that’s specifically designed for car purchases, or you can take out a traditional personal loan and then use those funds to buy a car. In return, you’ll repay the money you borrow (plus interest) over a set period of time, known as the loan term.
While it’s possible to secure vehicle financing without a down payment, some lenders may require one to approve you for an auto loan. Even if a down payment isn’t required, it’s still a good idea to make one: The larger your down payment, the less money you need to borrow and the sooner you can repay your auto loan. A good rule of thumb is to make a 20% down payment if you’re buying a new car and a 10% down payment for a used-car purchase.
Your monthly auto loan payment will consist of two parts:
Not all auto loans are the same, and you’ll need to shop around to find the best car financing option for you. Keep these things in mind to make sure you find the best auto loan for your situation:
Once you find an auto loan that meets your needs, you can apply for the loan.
Your monthly auto loan payment amount depends on multiple factors, starting with the car’s purchase price (minus any down payment or trade-in amount) and whether the car you’re buying is new or used.
These factors also affect your monthly payment amount:

When it’s time to pursue auto financing, you have a few options:
If you’re looking for a personal loan to buy a car, Credible makes it easy to see your prequalified personal loan rates from multiple lenders, all in one place.
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While there’s no one “right” credit score you need to qualify for an auto loan, generally, the higher your credit score is the easier it is to qualify for a lower interest rate. All lenders have different credit score requirements, and it’s possible for almost anyone to secure a car loan. But if you have a low credit score you can end up with a high APR, and you may need a cosigner with good credit to help you qualify.
The table below shows average interest rates for new and used cars based on borrowers’ credit score ranges as of the first quarter of 2020:
Here’s an example of how your interest rate can affect how much you pay to finance a car.
Let’s say you have a super prime credit score (720 or above) and want to buy a new car. If you qualify for a 3.65% interest rate on a five-year, $25,000 loan, you’d pay $27,388 over those five years.
But if you have deep subprime credit (579 or below) and paid a 14.39% interest rate on the same loan amount and term, you’d end up paying $35,206 over the life of the loan — that’s $7,818 more in interest.
If you’re thinking about using a traditional personal loan to finance your car purchase, use our personal loan calculator below to get an idea of how much interest you might pay based on your credit score. Simply enter the loan amount, interest rate, and loan term to see how much you’ll pay over the life of the loan.
Enter your loan information to calculate how much you could pay
With a $ loan, you will pay $ monthly and a total of $ in interest over the life of your loan. You will pay a total of $ over the life of the loan.
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If you have poor credit, it’s still possible to get approved for a car loan, but your interest rate will likely be higher than someone with good or excellent credit.
If you’re struggling to qualify for an auto loan at a manageable interest rate, you can apply with a cosigner who has a good credit score and history. When you apply with a cosigner, the lender will take both your credit score and the cosigner’s credit score into consideration. But keep in mind that if you fail to make your auto loan payments then your cosigner will be on the hook for them. If both of you fail to make the payments then both your credit scores will be negatively affected. Before someone agrees to cosign a loan, they should be aware of what the agreement entails and what their risks are.
You can also spend some time improving your credit score before you apply for an auto loan to better your odds of being offered a more favorable interest rate. If you’re working on your credit, these things can help you boost your score:
The personal loan companies in the table below compete for your business through Credible. You can request rates from all these partner lenders by filling out just one form (instead of one form for each) and without affecting your credit score.

Whether or not financing a car is a good idea depends on your unique situation. No matter what your finances look like, it’s always a good idea to shop around for the best deal when pursuing financing. Comparing interest rates, loan terms, and fees for multiple lenders will help ensure that you find a loan that best meets your auto financing needs.
Credible makes it easy to compare your personal loan options. You can see your prequalified rates from multiple lenders in two minutes — without affecting your credit.
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Jacqueline DeMarco has been a personal finance writer for over seven years and is a contributor to Credible. She has contributed content to more than a dozen financial brands, including LendingTree, Credit Karma, Fundera, Chime, MagnifyMoney, Student Loan Hero, ValuePenguin, SoFi, and Northwestern Mutual.
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