Auto Financing 101

What Is Auto Financing, and How Does It Work?

When you enter the market for your next vehicle, the shopping experience can be exciting – from exploring your options to taking a test drive. Here at Jay Hodge Ford of Morrilton, we understand that car shoppers typically don’t look forward to the financing process quite as much as that test drive, but we make every step of the journey easy and clear. Let’s go over the details of auto financing so that you can take each step with confidence.

When you finance your car purchase with an auto loan, you borrow money from a lender, often a bank or credit union. The lender will give you a set period of time to repay the loan via monthly payments, and they’ll charge interest on the loan as well. To better understand how this process works, get to know these financing terms:

Interest Rate: Your interest rate is the price the lender charges you for borrowing money. It is set as a percentage of the full loan amount.

Loan Term: The loan term is the time period given to repay the auto loan. These terms are usually 36, 48, or 60 months.

Conditions: The lender may add conditions to the auto loan, including penalties for late payments or rules regarding early loan payoff.

Types of Auto Financing

Lenders offer different auto loan plans to better suit various borrower situations:

• Secured Auto Loans: A secured auto loan is backed by your vehicle as collateral. That means that the vehicle could be repossessed if you default on loan payments. This loan type could also entail a lower down payment and lower interest rate.
• Unsecured Auto Loans: There is no collateral required for this auto loan, and your eligibility is tied to your credit score. It may come with a higher interest rate than a secured loan, and it’s a valuable option for car shoppers concerned about their credit score or making a down payment.
• Auto Refinance: In some cases, you can take out a new loan to pay off the original auto loan. If your credit score has improved since you took out the first loan, and you want a lower interest rate, this might be a useful option.
• First-Time Car Buyer Loans: If this is your first car-buying occasion, this loan type can connect you with appealing benefits like a lower down payment or waived application fees.

Factors that Affect Auto Loan Rates

Several factors impact your auto loan’s interest rate:

Credit Score: A high credit score can lead to lower interest rates on your auto loan. Keep in mind that lenders will look at more than just the score itself, considering details like the debt-to-income ratio.

Loan Term: If you go with a short auto loan term, you’ll set yourself up for higher monthly payments with a lower interest rate, since you won’t have as long to pay off the loan. Even though the monthly payment is higher, you’ll actually pay less money in the long run since there’s less interest charged on the loan.

Down Payment: By making a larger down payment, you can prepare for a lower interest rate, since there would then be a lower amount remaining to pay off. Remember that you can also use your current vehicle’s trade-in value toward the down payment, so use our Value Your Trade tool to see how a trade-in can help you buy your next car.

Vehicle Age: Because lenders consider newer cars less likely to break down, you can secure a lower interest rate for a new model. New cars might also be available with dealer or manufacturer promotional rates that you typically wouldn’t find with older used cars.

How To Determine Your Monthly Budget

To stay within your means, it’s helpful to set a budget for your automotive expenses. Remember that experts suggest keeping all transportation expenses within 15 percent of your income. Those expenses wouldn’t just be your auto loan payments, so remember to factor in costs for gas, maintenance, and insurance. To get an idea of what car insurance costs would be, ask your preferred insurance company for a quote.

Get Pre-Approved for Financing with Jay Hodge Ford of Morrilton

When you get pre-approved for auto financing, you can shop with confidence, knowing just how much car you can afford. We make it easy to apply for financing with our secure online form, and with a few quick questions, we can help you find the lender and auto loan you need to purchase the right model for you. Call or come see us at Jay Hodge Ford of Morrilton if you have any questions about financing. We’re ready to work with you at 948 Highway 287, Morrilton, Arkansas, 72110.