How does car financing work in the United States?

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These days, thanks to the ease of credit that exists in the market, it is very easy to acquire various types of goods and services, a notable example is the acquisition of cars, whether you have the money or not, there are various financing methods with which you can buy it and pay it over several years.

 Do you know how different forms of financing work?

It is commonly known that financing is to reach an agreement to pay for the purchase of a new or used vehicle, with money borrowed from a lender, a bank or the dealership itself; both the funder (who lends the money) and the financed person (who agrees to pay the loan), agree on the amount to be paid for a certain time, adjusting the amount and interest to define a monthly value, according to the term (amount of years), this monthly value can be high or low.



It is very important to consider several points of the financing before committing to it, explains the Federal Trade Commission of the United States, the amount you pay will depend on various factors highlighting these three:

The value for which the vehicle is negotiated.

The annual percentage rate (APR), for which it can be negotiable
the duration of the contract and the terms to make the payment.

Keep in mind before designating the number of years in which you will make the financing contract that, the value of a car is reduced by 10% when you take it out of the dealership, and its value continues to decrease with the passing of the years, in addition, there is always that “interpreting” the fee related to the total financing term, that is, all the fees must be added:

a fee will always be lower for the simple fact that the term is longer, but this implies paying a larger number of fees .

Opening expenses, These are costs that are charged “at once” at the time of starting the financing, basically, it would be the opening commission (existing in both types of financing, although usually higher in the case of dealers) and notary fees, which are given only in some bank financing.

Once you are clear about these variables, you could assess the cost of financing in each case. As a general rule, taking into account all aspects, the cost of global financing is usually similar between financial institutions and concessionaires.

Let’s analyze the pros and cons of each one:

FINANCING AT THE DEALER

On the positive side, the cost of financing is usually not higher than that of bank financing. Depending on the case, and taking into account all the factors (including the dealer’s discount), it can be a little cheaper, or a little more expensive. On the other hand, there are usually no major problems in the concession, which is usually agile, almost immediate. Finally, this option usually entails a discount on the price, but the high cost of the opening commission usually “compensates” it, at least in good part.
On the negative side, the additional conditions, domain reservation clause, minimum amount to be financed, additional services, mandatory stay, the possible permanence clause of the financing stipulated by the concessionaire must be taken into account (normally, for a period not exceeding 36 months), whose breach would consist of a penalty for the amount of the discount.

FINANCING WITH THE FINANCIAL ENTITY

On the positive side, the financing costs are usually similar to the financing of a dealership (including the dealership discount in their calculation), generally without the additional conditions we have just seen, what they can do less flexible and somewhat more expensive in its entirety the financing in the concessionaire, in comparison with the bank financing.

In addition, this financing is usually less limited, since it can be used for the purchase of any vehicle and does not require a minimum amount or term.
On the negative side, banks and credit institutions banks tend to analyze more risks when granting loans.

And, although in some cases, clients of financial institutions already have pre-granted and automatic financing, such as that available, in many others they will need the order of 2 or 3 days to study the financing and will ask them to provide a payroll or a guarantee, unless your trajectory with the entity ensures sufficient solvency.

Analyzing all the information and benefits by time, you can choose the type of financing that allows you to pay according to your monthly income, taking into account the final value that you must cancel compared to the real value of the car, It is important to compare different plans of payment for both the monthly payment and the total payments required, for example, for a credit purchase of 48 months / 4 years and 60 months / 5 years ”.

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