An Indispensable Guide to Car Financing

People at mechanic with car

Most people who are looking for a new car will want to explore finance options, especially if it’s their first time. Only a minority of drivers have the cash available on-hand to buy a car outright, after all! So the chances are that you’ll be reviewing what finance options are available to you.

Of course, finance is never as simple as they make out. That isn’t to say that you should avoid it. Finance is definitely a smart way to go about getting a car. But if you get things wrong during this process, then you could be setting yourself up for quite a bit of financial frustration in the near future.

This here is a quick guide to car finance. Hopefully it will make your options a little clearer! Here’s what you need to know about finance in the world of car dealerships.

Using a credit card

For many people, this is the most obvious way to get your hands on a car. As with many financial decisions in life, it seems to make a lot of sense to use your credit card to get the car if you don’t have the cash upfront. It’s the most used option when it comes to general credit, after all! This option is available to you, for sure. For many, it will be the most attractive option. You probably already have some experience dealing with credit card debt, after all, even if it’s only been small debts so far. Of course, whether or not you can do this will mostly depend on your credit limit!

But this option can also be one of the riskiest, as well as the most expensive. You need to be absolutely confident that you’ll be able to pay all the necessary charges every month. Of all the options, this is the one that poses the most direct threat to your credit score. It’s worth remembering that not all dealers will accept credit cards. Those that do will probably charge high interest.


Strange as it may sound, you may actually be able to borrow more from your mortgage to pay for a car. It seems like the obvious solution to many people who have a home mortgage and are looking for a car. Interest rates on this are probably going to be quite low, too.

But remember in the last section where I referred to the credit card route as one of the riskiest options? Well, the reason I didn’t straight up say it was the riskiest is because this option exists. When you borrow against your mortgage, you’re putting your home at risk. Missing repayments can mean having your property used as collateral to make the payment!

Looking into dealer finance

The vast majority of car dealers will offer finance directly from the dealership. After all, they’d go out of business pretty quick if they required everyone to pay every penny upfront! Going down this route is the most frequently used option, and is generally more desirable than using a credit card or borrowing more from your mortgage. It’s a lot safer, for one! The commitment isn’t anywhere near as heavy, although your credit score is still at risk if you fail to repay on time.

Many of the finance options available these days are created by the car manufacturers themselves. There are usually a lot more options than is made clear at first. It’s worth speaking to a car dealer about all of the finance options that are available. And remember: even if you’re going with finance options, you are still free to try to lower the price!

Bad credit

When we talk about the finance options that dealers can offer you directly, it’s worth talking about your credit score. It’s worth remembering that when a car dealer offers you finance that they are essentially acting as a lender. And, just like any other lender, they’re going to want to check your credit score to see how safe a bet you are.

The good news is that car dealerships are often a lot more forgiving that other sorts of lenders. But you have to be very careful if you do have a bad credit score. The amount they can end up charging you in such a case can be gobsmacking. It might be best to consult with a lender independent of the car dealer, such as ApproveNow.

0% APR

APR stands for annual percentage rate. This is a kind of interest rate that spans a twelve-month period. The vast majority of finance options will come with APR, as this is where many of the dealers make a lot of their profit. The average APR will be between 10-30%. However, for a small fee, you can usually pay off the entire cost within a year without having to pay interest. APR usually comes into play when the payments take two years or more.

While it’s not that common, you may be able to find finance options that come with 0% APR. Which, barring any other interest fees, means you won’t pay any interest! This is what you want to look out for, though don’t be too surprised if the car you want can’t be attained without APR. However, a 0% APR scheme usually comes with the condition that you don’t miss any payments. If you miss payments, you could be switched to a finance scheme that includes APR.

The two types of purchases

There are actually many types of purchases you can make from a car dealer. However, it is highly likely you’ll be going with one of these two. The most common type of finance you’re going to find among car dealers is called a hire purchase. The finance will be secured against the vehicle. This means that you can drive it out of the lot as soon as the paperwork clears. However, the car doesn’t actually legally belong to you. You often end up paying a pretty low deposit, potentially as low as 10%. You don’t actually own the car fully until the final payment is made. It’s definitely an option worth learning more about.

The second most popular type of finance option is called a personal contract purchase. It’s actually very similar to hire purchasing, as you don’t own the car until the final payment. The nature of the final payment is slightly different, though. It takes the form of what is called a balloon payment. You can either pay that final payment, or you can return the car to the lot. This makes it ideal for people who need a car on a short-term basis. The deposit is usually higher, but the monthly payments will be much lower than with hire purchase.

Aaron Turpen
An automotive enthusiast for most of his adult life, Aaron has worked in and around the industry in many ways. He is an accredited member of the Rocky Mountain Automotive Press (RMAP), the Midwest Automotive Media Association (MAMA), the Texas Auto Writers Association (TAWA), and freelances as a writer and journalist around the Web and in print. You can find his portfolio at