Financing

As you consider buying a car, you must also determine how you’ll pay for it. You might pay cash, use a loan or lease the car.

If you borrow or lease, car dealers will examine your credit history. The way you’ve used credit in the past will determine how easy — or difficult — it will be for you to finance, or borrow money at a reasonable interest rate. So it’s smart to check your credit history several months before you go car shopping so you know about and can take steps to correct any potential problems or errors. You’re entitled to a free copy of your report from each of the three national credit reporting bureaus each year. All you have to do is go to www.annualcreditreport.com or call 1-877-322-8228.

How financing works

Financing a car is relatively straightforward. If you are purchasing from a dealer, you may obtain a car loan directly from the dealership, often through the car manufacturer’s own lending operations, called dealership financing. Or you may prefer to go to a lending institution, such as a bank, credit union or finance company, to secure a loan, known as direct lending. With a bank loan, you know you are preapproved to borrow up to a certain amount before you start shopping, which may simplify your search.

If you are buying a used car from a private individual, you should be prepared to pay cash in the form of a certified check or money order — although some finance companies will arrange loans for people who buy cars from other individuals, known as a person-to-person used-car loan. In this case, the finance company provides a check that you use to buy the car.

However you finance a car, you agree to pay back the amount you borrow over a certain period of time, plus finance charges, expressed as an annual percentage rate (APR). The most popular automobile loans range from 24 months to as long as 72 months, though you may want to think twice about taking a loan that lasts longer than the warranty on the car. It’s rarely longer than five years or 50,000 miles and may be less.

The fine points on financing

What you pay in finance charges may depend on the type of car you purchase as well as your financial situation, your credit history, and whether you go to an outside lender or use the dealership’s financing operations. Some lenders will charge higher interest rates — usually about two percentage points higher — on used cars. And many finance companies are hesitant to lend any money at all on cars that are more than four or five years old. In this case, you’ll probably have to pay cash.

If your credit history is weak or you haven’t borrowed before, you may be asked to provide a co-signer on your auto loan. In this case, someone close to you — a parent or other close relative — helps you finance the car by assuming responsibility for the loan if you miss payments.

When you finance a car, you are not its actual owner until you pay off the loan. The finance company, bank or credit union is the official lienholder on the vehicle.