Definition of Financing a Car
Buying a new car requires you to make many decisions besides choosing the make and model of vehicle you want, such as how to finance the car. In the auto industry the term "financing" refers to how you pay for a vehicle. Buyers can choose from several different financing arrangements that can affect the cost of vehicle ownership.
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Car Financing Basics
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Car financing, in the broadest sense, can refer to any arrangement made to fund a vehicle, but the term is commonly used in a more narrow sense to refer specifically to auto loans. Most people that want to own their car do not have enough money to pay for it in cash, so they take out loans to help finance their purchase. According to LendingTree, the auto loan industry generates around $500 billion a year, as of 2011.
Financing Options
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While auto loans and auto financing are often used as synonyms for one another, there are other options to pay for the use of a car apart from borrowing money. Perhaps the simplest car financing option is to pay in cash. When you pay for a car in cash you will not have to pay interest and you will fully own the vehicle as soon as you start using it. Leasing is another common option. When you lease a car you pay a dealer a monthly fee to use the car rather than buying the car outright with cash or a loan.
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Buying vs. Leasing
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When you own a car you can sell it later on to recoup some of the cost of its purchase. The cost of buying a car may also be less than leasing over the long term. Leasing is advantageous in that it typically requires low upfront costs and you do not have to use a car for more than a few years. Once a lease ends you can sign a new lease on a different vehicle, allowing you to upgrade to a newer model.
Considerations
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Auto dealers usually offer loans to help customers finance their purchases. If you choose to take out a loan to finance a car, borrowing from the dealer may be the most convenient option, but interest rates may be higher than those you could get through other lenders like banks. In general, the longer the term of a loan, the more costly it will be in terms of interest paid. Choosing a three-year loan versus a five-year loan can save you thousands of dollars in interest.
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