How Car Financing Works and How It Affects Your Credit


By: Vontae Jones

You’ve heard the dealerships’ slogans before. They promise that no matter your financial circumstances–good credit, bad credit, no credit–that they can have you driving off their lot with a brand-new vehicle before the day ends. But what does it really mean? If you’re like me, you’re skeptical when you hear someone offering something for nothing in return, but, in this case, there’s truth behind the promise, and it all gravitates around vehicle financing. By the end of this article, you’ll know why many dealerships build their business around vehicle financing and be prepared to make an informed financial decision. If you live in the Novi, Metro-Detroit area, there’s a special offer for you with deals from Bobby the Car Guy, a reputable salesman that I’ve recommended in the past.

What’s Financing Anyway?

Financing a vehicle means you are taking a loan out to cover the difference between the amount of money you put down on the car and the car’s agreed-upon price. Sometimes, dealerships require a minimum down payment–why you’ll often hear “$0 down” as a promotional tagline. The total amount of money you borrow–called a principal–is subject to various yearly interest rates–APR–and when you make monthly payments against the principal and the accumulated interest, the loan provider generates a cash flow. Therefore, it’s typically best to put more money down on a vehicle to reduce the principal. The larger the principal, the larger the monthly interest you’re going to pay, and since interest is the fee for borrowing money, you’re essentially inflating the cost of the vehicle beyond its sticker price. That’s not to say that you should never finance a car because there are plenty of scenarios where it can be beneficial for you. For example, suppose you’re about to get a new corporate job and need a reliable vehicle, you can finance a newer car and, once you begin making money, pay off the entire principal before the interest piles on. However, be aware that sometimes there are penalties for paying off your loan early, so if that’s something you’re planning to do, make sure there aren’t any repercussions before signing into a deal.

You Can Get a Loan from a Bank or a Dealership

You have two options when choosing to finance a vehicle. The first is to go through a bank’s or credit union’s loan officer to receive their backing. This route is more difficult because banks typically have more stringent requirements to meet before they agree to loan terms. So, if you experienced prior financial difficulties–such as bankruptcy or bad credit–you may find it challenging to get approved this way, and if you do, you’re likely to have to pay an exorbitant APR. The second route is to finance directly with the dealership, which Bobby the Car Guy offers and specializes in. Many dealerships have advertisements that promote financing for people with a rocky financial history because they control the lending requirements and often adjust them to meet people’s needs. For example, for Bobby the Car Guy’s Cadillac dealership in Novi, the requirements for approval–regardless of credit standing–are earning at least $2,000 a month and having at least $1,000 available for a down payment–these baselines verified through documentation and references. Those are much simpler requirements than a bank because the dealership wants to sell you the vehicle! This is how dealerships make most of their money, so you’re more likely to get a favorable deal if it means pushing the sale through.

Which One to Choose?

At this point, it seems like an easy decision to finance with a dealership over a bank if you’re in the market; however, it’s usually not that simple. Let’s assume you are in decent financial standing and have the option to go with either a bank or a dealership. In this case, it’s best to compare the offerings of both institutions. It isn’t always guaranteed that a dealership will give you the best deal. There have been reports of some iniquitous dealers artificially increasing the APR on your loan so they can pocket the difference. This isn’t something you have to worry about with Bobby, but it’s always a good practice to stay informed when making big financial decisions and be aware if you’re getting a good deal or not. When it comes to financing a vehicle, the goal is to get the car you want with the best loan package possible, regardless of where it comes from.

What About my Credit Score?

If you are rebuilding your credit, taking out an auto loan can be an excellent way to demonstrate your reliability as a borrower by making continued on-time payments. The thing is, you have to get approved for that loan in the first place. If you are in this boat, it may be in your best interest to skip applying at the bank and go directly to a dealership where you have the best odds of getting approved. I mention this because the more you apply for loans, the more hard-credit-checks institutions will run on credit history. This is always a bad thing and will certainly decrease your score. It’s the same reason why you shouldn’t apply for a bunch of credit cards if you keep finding that you’re getting denied. So, be honest with yourself, and do some research before attempting to get approved for a loan. The more denials you receive, the worse it will reflect on your credit.

Conclusion and Helpful Links

In short, taking out an auto loan is a decision that you should supplement with research and inquiries. There are multiple nuances between various institutions; for instance, banks are more likely to give you a loan if you’re looking to buy or lease a newer vehicle, and your monthly payments will be lower if you’re leasing a car–renting it and returning it to the dealership at the end of the term–when compared to buying it. Save yourself time and potential credit infractions by calling ahead and making sure you’re eligible for approval regardless if you’re choosing a bank or a dealership to partner with. Below I have links to my good friend Bobby the Car Guy and a previous article I wrote on tips for buying a used car. I wish you all the best of luck with your endeavors!

Bobby the Car Guy Facebook:

Bobby the Car Guy website:

Tips for buying a used car:

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