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All About Auto Financing

You may be looking for your first car, having recently received your shiny new license with a photograph that makes you look like you're on the most-wanted list in several countries. You might be a seasoned driver seeking to update your vehicle for the first time in years. In either case, unless you have enough in the bank to pay cash for the vehicle of your choice, you'll be looking at financing your purchase.

Financing options
There are two financing options: direct lending or dealer financing.

Direct lending - As the title suggests, this loan comes directly from your bank, finance company, or credit union. You agree to pay the amount financed over a given period, plus a finance charge. Once you enter into a contract with a dealership to buy a vehicle, you use the loan from the direct lender to pay the dealer.

Choosing this method of auto financing gives you the ability to shop around. It's beneficial to ask several lenders about their credit terms, allowing you to make comparisons, and understand the credit terms in advance. Knowing your rate before buying the vehicle is powerful information to have when you step onto the car lot.

Dealership financing – This loan is financed through the dealership. Again, you agree to pay the amount financed over a given period, plus a finance charge. The difference here is your contract is with the dealer rather than a bank.

This option is quite convenient, since your vehicle and financing arrangement happens in one location, right where you found the car you want. Dealers also tend to have relationships with a variety of banks and finance companies, offering you a range of financing options.

Regardless of which financing avenue you take, remember that comparison-shopping is the best way to find both the vehicle and the finance terms that suit you best.

Personal documents
You'll need to prepare some documents before approaching a potential lender.

Proof of income
You will be required to show proof of income. The lender wants to know that you have a job and will be able to pay back the money they lend to you. Pay stubs or automatic deposit receipts should do the trick. If you're self-employed, you will have to provide at tax returns for at least one year.

Proof of residence
This proof may be simply a bill that shows your address or a driver's license showing your name and the address you gave on the application.

Credit history
Although you won't have to provide your credit history, the lender will require the information needed to check your credit. Typically, your full name, social security number, and date of birth are all they should need to be able to access your credit report. You should check your score every year, so you know what they'll be seeing!

Vehicle information
If you're getting financing through a bank, finance company, or credit union, the lender will usually request a copy of the buyer's agreement or sales agreement from the dealer. When you first apply, you may be able to give the vehicle information verbally, but at closing, the lender will want to see a legally binding agreement stating all the pertinent information.

If you purchase from a dealer, they will provide you with this form. If you buy from an individual, you will need to write up a bill of sale with the signatures of both parties.

You will need to obtain the title to the vehicle as well, and the lender will likely take care of adding his or her name as a lien holder. Until you pay off the car, the lender will retain the title until payment is complete.

Proof of insurance and license
The lender will need to make sure that the insurance is valid on the vehicle, so they will probably ask for a document showing that the particular car has insurance.

Calculate loan requirements
This is a crucial step. Know your monthly budget, find a combination of vehicle and financing that doesn't bore a hole in your pocket, and make a sensible decision.

Obtain the following info:

vehicle price
financing term
interest rate (APR)
down payment, if any
Trade-in value, if any
sales tax
The title, registration, and any additional fees

Search for online Auto Loan Calculators to assist you in figuring out the bottom line.

Compare rates
Make sure competitive interest rates are high on your priorities. Even though rates can depend heavily on your credit score, what one lender offers may differ vastly from another.

Here are a few examples to consider:

CarsDirect - This online service not only provides a portal for getting a competitive auto loan, but also great tools such as a trade-in-value calculator, loan calculator, and wider range of information on car financing and buying strategies.

MyAutoLoan - Another online service arming you with tools such as an interest-rate estimator that bases its results on your credit score, location, and the type of loan you're applying for, MyAutoLoan connects customers with lenders and covers all the key loan types with the bonus of optional, lease buyout applications.

U.S. Bank - Being one of the big-bank lenders, U.S. Bank offers a potent blend of options with competitive interest rates. These options even include loans for cars purchased from private sellers, which many banks wouldn't touch with a ten-foot cattle prod. As long as the car is less than six years old and has fewer than 100,000 miles, used-car buyers are also not automatically penalized with higher interest rates. Not bad at all.

Auto Credit Express - This Company specializes in helping people with poor credit obtain car loans, using its experience to create more options and better interest rates. Auto Credit Express even works with folks who have declared bankruptcy.

Review of contract and purchase agreements
Don't be intimidated by the contract. It's not as foreboding as it looks. Relax and don't get overwhelmed by the language. Carefully review the numbers in the boxes, gather the prices, important numbers like your down payment, the total amount to be financed, the term of the loan, and your interest rate. Plug them into the Auto Loan Calculator and see if the result is what you expected.

If the numbers fit your expectations, then you can confidently sign that deal. If they don't, review the figures again and keep a sharp eye to see if the dealer has changed anything or added an undisclosed cost.

You don't need to fear signing a deal. As you know, running the numbers ahead of time prevents unpleasant surprises after signing.

Create a budget and stick to it
Know your credit score
Shop around for options
Shop around for vehicle options
Check insurance costs
Don't be afraid to negotiate with the dealer
Watch out for additional costs like extended or aftermarket warranties
Read all contracts, run the numbers, ask questions before you sign

Financing a major purchase can be intimidating. Lenders sometimes seem to speak an obscure language, and documents may be difficult to understand. Take your time, and always look at several possibilities before making a decision. Read everything before you sign it, ask for clarification of anything you don't understand, and never let anyone pressure you into signing something until you are completely comfortable. Good luck!