Getting Car Financing: 101

Financing 101 at Townsend Nissan

When you’re getting ready to buy your next car, you can look forward to the thrill of the hunt as you explore all your options, and there’s a good chance you’ll fall in love while test-driving a Nissan like the Sentra or Rogue. The next step – the auto financing process – might not seem as exciting at first blush, but understanding the basics can help you secure the auto loan you need to drive home in the car of your dreams. Let’s take a look at the details of the financing process to see how easy it is to get an auto loan in Tuscaloosa, Alabama.

What Is Auto Financing and How Does It Work?

When you finance a vehicle purchase, you borrow the money you need from a lender, agreeing to pay it back over a set period of time. The lender could be a bank, credit union, or other source, and you repay their loan amount plus interest via monthly payments until the loan is completely paid off. Since even the most affordable vehicles are typically considered a major investment, it’s very common for cars to be purchased this way, as relatively few car shoppers intend to pay with cash on the spot.

Interest Rate: This is the price paid for borrowing the lender’s money. It’s represented as a percentage of the actual loan credit.

Loan Term: The loan term is the amount of time given to repay the loan. Loan terms are generally set for 36, 48, or 60 months.

Conditions: An auto loan can come with certain conditions, like rules governing early payoff or penalties for late payments.

Types of Auto Financing

There’s more than one kind of financing plan, so familiarize yourself with options suited to various situations:

  • Secured auto loans: A secure loan is backed by the vehicle that you purchase. That means that the lender can repossess the vehicle if you default on your loan payments. These loans generally come with lower interest rates than their unsecured counterparts, and they also necessitate a down payment.
  • Auto refinance: Sometimes, it’s advantageous to take out a new loan to pay off the original auto loan. If you have recently improved your credit score or if you’re seeking a lower interest rate, this option might benefit you.
  • Leasing: When you lease a vehicle, the dealership retains ownership, and you essentially rent the model for a set period (often 24 to 36 months). When that period ends, you usually have the option to return the vehicle and lease a new one or buy the vehicle you’ve already been driving. Since your monthly payments are only intended to cover value depreciation, they can be lower than auto loan payments for a similar model. Keep in mind that you won’t own the vehicle at the end of the lease unless you then buy it.
  • First-time car buyer loans: If this is your first time purchasing a vehicle, you might be able to take advantage of a first-time car buyer loan, which can offer a lower interest rate than other auto loans. This loan type might also include other perks like a lower down payment or waived application fees.
  • Unsecured auto loans: This loan type is not backed with any sort of collateral and is dependent on your credit score to gauge your eligibility. Unsecured auto loans often come with higher interest rates than secured loans, but they can also be a valuable avenue to ownership if your credit history isn’t what you want it to be or if you have concerns about making a down payment.

Factors that Affect Auto Loan Rates

Your auto loan rate depends on several factors:

Credit Score: higher credit scores generally garner lower interest rates, but there’s usually more to it than the score alone. Your debt-to-income ratio and other factors could be considered as well.

Loan Term: If you opt for a shorter loan term, you may have lower interest rates and higher monthly payments since there’s less time to pay down the borrowed amount. Even though the payment each month is higher than a longer loan term’s payment, the lower interest rates mean that you’ll actually pay less overall.

Down Payment: If you make a larger down payment when you purchase your car, you can generally expect a lower interest rate since you now have a lower amount to pay off. If you have a vehicle that you want to trade in, you can use its trade-in value toward the down payment, and our Value Your Trade tool can show you how much you could get for your vehicle.

Vehicle Age: Newer models frequently come with lower rates than used vehicles because they’re considered less likely to break down. New vehicles might also be available with manufacturer and dealership promotional rates that you won’t find with used vehicles.

How To Compare Auto Loan Rates

Just as you’re likely shopping around and comparing cars, it’s a good idea to compare auto loan rates to see what’s available. You can save considerable funds if you weigh your options carefully, so get quotes from multiple lenders, then compare their terms and interest rates side by side. Take a look at each annual percentage rate (APR), which has the interest rate and other expenses.

How To Determine Your Monthly Budget

It’s important to purchase within your means, so prepare a reasonable plan that allows you to finance your next vehicle within your budget. Conventional wisdom dictates that you shouldn’t spend more than 15 percent of your monthly income on transportation, and that includes your auto loan payment as well as its insurance. With that budget in mind, consider the fuel and insurance of any vehicle you’re considering. To get an idea of what car insurance would be, just request a quote from your insurance company.

How to Get Pre-Approved for an Auto Loan

Getting pre-approved for auto financing lets you enjoy the car-shopping experience with peace of mind. To get pre-approved for an auto loan, you’ll need to share some essential information about your credit, employment, and income for potential lenders to consider. The lenders will then offer a quote for how much they can lend as well as the interest rate you can expect. With that info in mind, you can further narrow down your options for the car you want to buy. To get started, you can apply for financing online with our secure form.

Visit Us at Townsend Nissan

If you have any questions about the financing process, call or come see us at Townsend Nissan. We want to put you behind the wheel of the vehicle you need, and you can count on us through every step of your car-shopping journey, from discovering the model you love to securing the auto loan you need. We hope to see you soon at 2620 Skyland Boulevard E, Tuscaloosa, Alabama 35405.

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