car loan is a better choice

Financing a car means taking out a car finance that you repay over time. When you take out a car finance, you agree to pay back the amount you borrowed, plus interest and any fees, within a set period of time. Shopping around and comparing car finance offers could save you significant money in interest and fees.

That’s why financing a car — taking out a car finance to pay for a car — is common. You can think of a car finance as its own separate purchase — it comes with a cost, which you pay through any interest and fees the lender may charge.

Let’s take a look at how car financing works, how your credit can affect your loan terms and what to think about when trying to decide if financing a car is a good idea for you.

When you finance a car, a financial institution lends you the money you need to buy the car. In exchange, you pay the lender interest and possibly fees to borrow that money over a specific number of months.

Car financing options include banks, credit unions, online lenders, finance companies and some car dealerships. Financing through a credit union or bank may be less expensive than getting a loan through a dealership because dealers may increase interest rates to pay themselves back for arranging your financing. And some dealerships provide their own financing. Referred to as in-house financing or “buy-here, pay-here” dealerships, these car dealers may charge interest rates that are much higher than those charged by other types of lenders.

If you plan to finance a car, you’ll need to shop and apply for a car loan. If you’re approved, you’ll make monthly payments until the loan is paid off. 

Your monthly payment is determined by your loan amount (the car’s purchase price minus any down payment and trade-in), annual percentage rate, or APR, and loan term. The APR is one of the biggest factors to consider. It affects how much money you’ll end up paying for the car. Different factors can affect your interest rate, including your credit, loan term and whether you’re buying a new or used car.

Once you repay the loan in full, your lender will usually send a lien release document (depending on your state) to the state transportation agency. The car’s title will then be updated and transferred to you.