How does car financing work? ?
I'm 20. Never been in a car crash or anything like that. I'm looking forward to buying my first car. I'm saving up maybe about $2,000 for down payment.
If I buy from the dealer.. let's say a car I want costs $7,000. I put $2k down payment, do I pay the $5,000 overtime or do I pay more than that ? Is there a fee if you finance ? Please let me know. Thanks!
- frank lynnLv 67 months agoFavourite answer
So, it's fairly simple (well, kind of simple). Your car costs $7,000. At that price it's probably a used car, which means "unfavorable interest rates" for the loan. You put down $2,000 as you said, leaving a $5,000 as the principle amount for the load. The loaning companies will charge you interest on the loan as the cost of borrowing their money and paying off their loan to you over time. The interest rate is charged on a monthly basis on the balance. You first few payments are made up mostly of interest with a very small amount applied to that principle balance. Towards the end of the loan term, the payment is made up of almost all principle with a small amount of interest included. It's the way financing works. In the final say so, you will pay more than the $5,000 you borrowed. That is the amount the lending institution makes off your loan. You can always pay off more than the loan payment and apply the extra to the principle. That will shorten the term of the loan and reduce the overall amounts paid. It is not against the law to pay off a loan early.
- Anonymous8 months ago
You will need good a few years of good credit and a good full time job with income close to $2000 a month.
Unless you go to a buy here pay here dealer and get reamed.
- ScottLv 78 months ago
Anytime you borrow money, you repay the principal (the amount you borrowed) plus interest. Interest is the cost of using someone else's money.
- Mr. SmartypantsLv 78 months ago
You will owe the $5000 plus interest. At first, you owe more of the principle so the interest is higher. But they have a formula where you pay the same amount over the term of the loan, just at first most of it goes to interest. A $5000 car may cost you $8000 by the time you get it paid off, if you add up all the payments. (The advantage, of course, is that you don't have to come up with all the money at once.)
It's not a good idea to let the car company finance the car, because they often make more money on the loan than the car itself. If you've been with one bank for several years, that's the place to go, because they can see your whole financial history for as long as you've been at the bank. If they will lend you the money, that will be the best rate. Call your bank and ask to talk to a loan officer. He/she will tell you how much you're good to borrow, and what kind of rates you can expect.
Also, very often the loan on a car, especially a new car, lasts longer than the car itself. Because you pay off interest first, after a few years the car might not be worth as much as you owe on it. If the car just totally dies within that time (not unusual with used cars) you still owe the money. They used to do 8 year loans, to make the payment lower (but the total amount MORE). Now I think the law doesn't allow more than 6 years, but even that is a long time for a car.
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- ElizabethHLv 78 months ago
Your finance the balance at x percentage divided over three or five years. As you have no credit rating, and it's used, the finance rate is higher than mine would be. In addition, you'll pay car insurance and maintenance. A used car might need lots of work. You won't know but would do well to take along a mechanic. Abetter option is to have your parents finance your car. I don't know what you can get for $7000. If confused, go to your bank and talk to a banker.
- ANDRE LLv 78 months ago
First of all, you have to QUALIFY for financing, and that depends on your income, and how long you've had that income.
Yes, unless you also QUALIFY for no interest financing, here would also be interest, charged at whatever rate you QUALIFY to get, and some fees in addition.
If you buy from a buy-here, pay-here place, the interest rate will be very high.
Frankly, you need to do a LOT more research on such matters. You are clearly nowhere near ready to buy any car that you cannot pay off IN FULL in cash.