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What Is Car Financing?

Car or auto financing refers to the use of a loan to finance the purchase of a new or used (per-owned) vehicle. While many people choose to purchase a car entirely with cash, many more opt for a car loan.
Car loans, like other loans such as a mortgage, involve a buyer working with a lender to finance a purchase. With a car loan you’ll make monthly loan payments to the lender, such as a credit union, bank or dealership-associated lender.
Understanding how car financing works can be tricky, but don't worry, we can help! It’s actually an easy process once you know where to start and this article will help you understand how car financing works.

Credit Union of Southern California (CU SoCal) is the fastest growing credit union in Southern California, offering up to 120% financing for new and used vehicles1, quick pre-approvals, no application or funding fees, a personal auto-buying concierge service, and more!

Call CU SoCal at 866-287-6225 to schedule a no-obligation loan consultation, or apply online today!

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Important Terms to Remember

Shopping for a new car is fun, but getting a car loan can be stressful if you aren’t prepared. Understanding these important terms can help take the stress out of applying for a loan:

Car Loan: This is the financing a buyer arranges with a lender, such as a credit union, bank or lending entity affiliated with the car dealership.
Interest: The interest rate and APR on a car loan are two different things. The interest rate does not include fees charged for the loan. So, what is APR financing on a car? The Annual Percentage Rate (APR) is the total cost the borrower pays on the loan each year, including fees, which are expressed as a percentage. When shopping for a car loan, look for a low APR.

Car Loan Term: This is the number of months during which you will have the loan. Most car loans are available in 12 month increments, up to as 84 months (which is seven years).

Principal: This is the money that you originally agreed to pay back. Interest is the cost of borrowing the principal. Generally, any payment made on an auto loan will be applied first to any fees that are due (for example, late fees). The remaining money from your payment will be applied to any interest due, including past due interest, if applicable. The rest of your payment will be applied to the principal balance of your loan.

Monthly Payment: The amount you’ll pay each month for your auto financing.

How Does Financing a Car Work?

Financing a car should begin with getting pre-approved for a loan. When a car dealer knows you’re pre-approved, it shows them you’re a serious shopper. Knowing your buying power before you start to shop will help you better negotiate the sales price and get a deal that works for your budget.
Your credit union or bank can provide a pre-approval by examining your credit score, income, debt, and other factors in order to determine the loan amount you qualify for. Keep in mind that just because you may be approved for a $40,000 loan, doesn’t mean you should purchase a car that will take you up to the loan limit. Always borrow what you can afford to pay back.

For more information about car financing check out our blog post "How To Finance A Car."

How Important Is Credit Score?

Car dealerships, credit unions and banks attract customers by advertising low car loan rates. However, the rate you ultimately get will be determined by several factors, including your credit score, the term (duration of the car loan), the amount of the down payment, and whether the car is new or used.

So, how important is your credit score in the grand scheme of things? Consumer Reports explains, credit bureaus may not gather the same information on you.

And you may see scores that use different scales: 300 to 900, 300 to 850, or something similar.

They're not the exact score that any given lender may be using to judge your loan application.

Lenders buy scoring software from FICO and other providers. And they have no obligation to show you the score they used to judge your creditworthiness. Lenders can make whatever credit tiers they want according to their own business needs.

For car companies offering financing, the amount of your down payment can significantly change the tier they put you in. And the tier you land in can make a huge difference in the annual percentage rate (APR) you'll pay.
Still, it is important to know your credit score in advance of shopping for a car. Having a high credit score will always put you in the best position for a lower interest rate loan.

To get a free credit report, contact Your credit union, bank or credit cards may also provide a free credit report. Keep in mind, credit scores are always changing based on your credit usage, so you may see variations in your score.

For more details, check out these informative articles: What Credit Score is Needed to Buy a Car? and What's a Good Interest Rate for a Car Loan?

Is Financing a Car a Good Idea?

Deciding whether to pay cash or get car financing is a personal financial decision. Paying cash for a car can save you money in the long-run because you’re not paying monthly interest as you would on a car loan.

One down-side of paying cash is that it requires you to hand over a large lump-sum of money. Before paying cash, take a careful look at your savings and expenses to determine if paying cash will leave you with no emergency back-up fund.

Fortunately, today’s low interest rates make it a good time to finance a car.

Where Can You Finance a Car?

There are several lending options available, so be sure to research each one to determine which is best for you:

Credit unions: Loan interest rates offered by credit unions are typically lower than rates at traditional banks. Credit unions, such as CU SoCal, offer many car finance options, can provide a loan pre-qualification, personal auto-buying concierge services, low-cost loan protection add-ons, no application or funding fees, and lending options for buyers with bad credit.

Dealerships: Car manufacturers offer interest rate incentives to car dealers which, helps dealers compete for your business. To get a good APR for a car loan, be sure to ask the dealer about financing promotions.

Banks: Similar to credit unions, your local bank branch can provide auto loan financing and can provide a pre-qualification. However, if you have bad credit or no credit, it could be more difficult to get approved for a loan, as lending guidelines are often stricter.

For more information on lending options, check out this article on Where To Get A Car Loan.

Apply For A CU SoCal Auto Loan Today!

Learning how to finance a car is easy and CU SoCal can help, no matter what your financing needs!

We lend on character, not just on credit scores. If you’ve been turned down for an auto loan because of a low credit score, we can either provide financing or help you form a plan to get financing in the future.

Please give us a call today at 866.287.6225 for an expert, no-obligation consultation, or apply for a CU SoCal auto loan today!

 Get Started on Your Auto Loan!

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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