Finance

What does it mean to finance a car

What does it mean to finance a car

What does it mean to finance a car is that a buyer borrows money from the car dealer or company to buy the car. The deal is usually short term usually between one to five years. The buyer and the seller agrees on the particular amount to be paid as interest rate and when to pay. The buyer can be making mortgage payment. Financing a car varies from a dealer to dealer as some dealer’s charge interest rate high while some charge low.

READ: What is financing a car

Before a buyer finance a car, it must be in agreement to pay back at a particular period of time. The buyer and seller both sign the promissory note stating all the terms and conditions applied in the deal. To finance a car is on the side of the buyer while car owner finance is on the seller side. This means car owner finance is the creditor while the car financing is the debtor.

How does financing a car work

Car loan

There are many reasons why an individual or buyer would want to finance a car or car loan. Some of it are listed below;

  • To avoid making payment to banks
  • The tax rate on finance car is reduced
  • The amount of the car to be finance is low
  • Some want to generate capital and funds with the car being financed by lending it out to another borrower.
  • The interest might be low or they want to use the cash at hand for an investment.

READ: How does financing a car work

Bad credit car finance

While financing a car can be advantageous to the buyer, there are some factors he should consider before financing a car.

  • Check for the durability of the car. It is known that car is a liability as when it starts wearing out, the expenses in taking care of it starts getting high.
  • The value at that time. Check if the car you want to finance has lose its value at that particular time or would lose it value very soon. It is no doubt that car loses its value very quick. If the car has spent up to six months at the dealers’ garage or shop, you should be certain at this time that the car value is going already and it is just a matter of another six months, the value will reduce. Although there are some exceptions where a car value increases rather but these cars that their value goes high with time are very scarce and are being hoard somewhere for the wealthy individuals.
  • The price of the car.
  • The interest rate charged on the car by the dealer. Some dealers charge a very high rate on the car financing. The interest rate varies from one dealer to another. So you should rather go for a dealer that has lower interest rate on the car financing.
  • What does it mean to finance a car is started with the mortgage payment which is another factor to be considered before financing a car. Mortgage payment also differs from one dealer to another dealer as some dealer’s charge higher while some charge lower. I would advise you go for the one you are sure of making the payment soon.
  • Consider the finance charge on the car if you could not to pay the mortgage payment at end due. You should know the seller has the power to sell the promissory note to another buyer who is willing to pay cash if you could not make your mortgage payment as at time due.

READ: What is debt financing

  • Check for the tax rate on the car to be financed. If the tax rate is going to a problem with the mortgage payment, it is going to be a problem for you as the cost of car financing would have increased.
  • The debt at hand is also a very big factor as it will be a problem getting the mortgage payment made in time before the due time.

In car financing, the seller also gains some benefit as he would be able to get the car to be financed off the list of the cars he has in his garage. The cost of caring for the car would also reduce. He has the benefit of increasing the interest rate and the finance charge that’s why they make you understand the what does it mean to finance a car. In car financing, both the buyer and the seller gains. The seller gets his car off the list while the buyer will not have to pay the bank for any charges.

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Harish Yadav

Finance and market analyst and chief writer on howtofinance. Passionate to read books and articles on marketing and accounting. Also edits other articles and publish them here.

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