How Does Auto Financing Work?

Wanting a new car and being able to afford one are separate issues. For many of us, the only way to get a new car is through auto financing, which means applying for a car loan. Before taking this pathway to buying a new vehicle, however, you want to learn what auto financing is and how it works.

Understanding Auto Financing: Your Comprehensive Guide

Auto financing involves taking out a loan to pay for a new or used vehicle, which is the most common way people buy cars, trucks, and SUVs in America. In fact, approximately 80% of people who buy vehicles use auto financing. However, not all auto financing packages are the same, and smart buyers need to understand their options and how those options meet their particular needs.

What Is Auto Financing?

Auto financing refers to the act of taking out a loan to purchase a new or used vehicle from a dealership. Borrowers then pay back the loan in monthly installments for a fixed period of time. There are many common sources for auto loans, including online and traditional banks, credit unions, and even dealerships.

Types of Auto Financing Options

There are two broad types of auto loans — new vehicle loans and used vehicle loans. Both types of loans are considered “secured,” meaning that there is physical property, in this case a vehicle, which serves as collateral for the loan.

Although buyers can obtain their loans from a variety of sources, auto financing generally works the same way. The lender pays for the vehicle, and then the buyer pays them back that money over time (known as the loan’s term) with interest. The total value of the loan (how much you borrow), the interest rate, and the term combine to determine your monthly auto payment.

How to Apply for Auto Financing

Obtaining an auto loan is a multi-step process that involves analyzing your personal finances and financial history with your lender to determine your ability to pay back the loan, your interest rate, and the payment terms that will fit into your budget.

Applying for Auto Financing

Buyers can apply for auto financing in person or online with one or more lenders, and many buyers choose to apply for multiple loans to find the best deal. Generally, the application process begins with discussing the loan amount, which is based on the cost of the vehicle and the amount provided as a down payment.

The next step involves submitting financial paperwork to the lender, including elements such as a current bank statement, pay stubs, and information on other monthly payments, such as a mortgage or rent, to help lenders determine your financial health. Lenders will use this information along with information about your credit history and credit score to determine what type of loans and interest rates they will offer.

Understanding Auto Loan Pre-Approval

At first, many buyers may not have enough information about the vehicles they want to buy to go through the full loan application process. In such cases, many buyers opt to apply for loan pre-approvals instead. Pre-approval is granted when a buyer goes through the financial assessment with a potential lender to determine how much money they can afford to borrow and how much it will cost to pay for the loan each month.

Pre-approval is a powerful tool in the purchasing process because it allows buyers to know how much they can afford before even stepping inside a dealership. This helps them manage their expectations and better negotiate a final price.

Exploring Auto Repair Financing and Payment Plans

In addition to getting a loan to pay for a new or used vehicle, some people choose to use auto financing to pay for auto repairs to keep their current vehicles in top shape. Auto repair loans are usually between $1,000 and $10,000.

Auto Repair Financing Options

People interested in auto repair loans have a couple of broad options for those loans. In cases where the vehicle itself has a high value and the individual already owns it outright (i.e., does not have another active loan on it), then it is possible to obtain a secure loan for repairs that taps into the vehicle’s equity. However, for those who still have an initial loan to pay off or whose vehicle is not worth enough to provide such equity, a personal loan for auto repairs is their best option.

Using a Car Payment Estimator: Planning Your Budget

Planning to buy a new vehicle includes several careful considerations when it comes to specifics, including finances, and the more you can plan, the better. Using a car payment estimator tool is one way to make sure you stay within your budget when looking at models.

Car Payment Estimator Tools

Using a car payment estimator tool is a great way to prepare to buy a new or used vehicle. By entering some simple data into the tool, including the amount of money you want to borrow, the term of the loan, and the potential interest rate, you can get a pretty accurate picture of a monthly payment amount. You can also use different numbers, such as higher down payments (lower loan amounts) and longer or shorter terms, to see how that affects your monthly payment for planning purposes.

Ready to Finance Your Mazda? Contact Us Today!

Are you ready to buy a new car or SUV? DePaula Mazda not only has an extensive inventory of new and used vehicles for you to consider, but we also offer competitive financing options that can make the process much easier. Ready to get started? Call today with any questions on auto financing.