Like most people, if you are considering purchasing a new car you will need to look for cars on finance. Rarely will most of us have enough available cash to just pay the entire cost at one time. Understanding how car financing works is an important step in making an informed decision about buying a vehicle.
What Is Car Financing?
When you purchase a new car and finance it, you technically own the car. A bank will step in and pay for the price you've agreed upon during negotiation. You are then obligated to the bank for the repayment of the car, and the bank will charge you interest for the convenience of using their money. It's basically a loan and the vehicle itself becomes collateral. The bank will generally require you to make a large down payment, usually equal to two or three months' worth of overall payments, before they will qualify you to borrow the money. This assures the bank that you will continue to make the payments on the remainder of the loan so you don't lose that investment. If you do end up defaulting on the loan, they will take possession of the car and try to sell it to make up for the money they are out.
Is the Car Mine While It's Being Financed?
The short answer to this is yes and no. The more payments you make on it, the more equity you build up in the purchase. During the time that you are making payments the bank does hold the title to the car, but it's still yours. You can make any customizations to it that you wish. Remember that any aftermarket parts you may add will go with the car if you default on the payments.
Once the loan is paid entirely, the bank will take their lien off the loan and issue you a clean title listing you as the only owner.
Why Should I Finance?
If you're like most people, the only option you will have to purchase a new car is through financing. However, if you have the cash on hand, there may still be a few reasons you might want to consider financing.
If your credit rating is really good you can get a pretty decent deal on interest rates. This will free up your cash on hand by just making monthly payments. This will also help to free up your current cash flow.
If you don't have good credit and want to work on building or rebuilding it, a car payment made on time every month will help to boost your score.
If you don't have a lot of debt currently, then adding a car payment shouldn't be a problem. Save your cash for the true emergencies that may pop up later.
