Financing a new car typically involves getting a car loan from a lender like a bank or dealership. The loan agreement will outline the financing terms like the principal amount borrowed, interest rate, and payment schedule.
When you finance a car, you don't immediately own the vehicle. The lender retains a security interest until the loan is fully repaid. Therefore, you must meet certain requirements set by the lender, like maintaining full coverage car insurance with comprehensive and collision coverage.
This section provides an overview of the key steps and terminology involved in financing a new car purchase. Understanding the basics will make the process smoother.
Required insurance for financed vehicles
When you finance a car purchase, the lender will require you to have more than just basic liability insurance on the vehicle. You will need to get full coverage car insurance to protect their financial interest in the car.
Full coverage typically includes:
- Liability coverage - covers injury or damage you cause to others
- Collision coverage - covers damage to your car from collisions
Comprehensive coverage - covers non-collision damage including:
- Theft
- Vandalism
- Weather events
- Fire
- Animal collisions
Uninsured/Underinsured coverage - covers costs if an at-fault driver has no or insufficient coverage
Comprehensive and collision coverage are specifically required for financed cars to cover repairs or replacement if the car is damaged. This protects the lender's investment until the loan is fully paid off.
Gap insurance is another recommended coverage for financed cars:
- Covers the "gap" between what your car is worth and what you still owe on the loan if the car is totaled
- Prevents being "upside down" on the loan if the car's value depreciates faster than the loan balance
The exact terms of required insurance coverage will be outlined in your loan agreement. Be sure to inform your insurance provider that the car is financed and provide your lender as a "loss payee" on the policy.
Failing to maintain the proper insurance on a financed car is considered defaulting on the loan. The lender may purchase their own insurance policy on the car at a much higher premium and add it to your loan balance.
So getting the right full coverage policy upfront saves money and avoids issues. Shop around to compare quotes on the coverages required for your financed vehicle. Also discuss options like adjusting deductibles or adding gap insurance with your insurance agent.
Parties involved in financing
There are a few key parties involved when you finance a car purchase:
Borrower - The person taking out the auto loan. Responsible for making payments and maintaining insurance.
Lender - The entity financing the loan. This is usually a bank, credit union, or the dealership.
Lienholder - The lender has a lien on the car title until the loan is paid off. They are listed on the title as the lienholder.
Other parties:
Insurance company - Provides required insurance policy
Loss payee - The lender will be listed as loss payee on the insurance policy to get paid for any claims
The main relationship is between the borrower and lender:
The borrower agrees to the financing terms in the loan agreement
They make regular payments over the loan repayment term
The lender provides the funds upfront to purchase the car
The lender has a secured interest in the car until the loan is satisfied
The lender is listed as lienholder on the car's title while loan is active
To protect the lender's interest, the borrower must:
- Maintain full coverage insurance on the car
- List the lender as loss payee on the insurance policy
- Not default on loan payments
If the borrower fails to uphold the loan terms, the lender can:
- Repossess the car
- Purchase their own insurance policy on the car
Carefully review the loan agreement to understand obligations as the borrower. Contact the lender with any questions on requirements before signing.
Maintaining open communication and meeting all terms is key for a smooth financing process.
Financing terminology
There are some key financing terms to understand when getting an auto loan:
Principal - The amount borrowed to purchase the car. This is the core of the loan.
Interest rate - The percentage charged on top of the principal by the lender. Basically the cost to borrow the money.
APR - The annual percentage rate. This represents the total cost of the loan including interest and fees.
Loan term - The length of time you have to repay the loan, usually in months. Common terms are 36, 48, 60, or 72 months.
Monthly payment - The amount you pay each month towards the loan principal plus interest.
Amortization - The schedule that determines how much of your payment goes to interest vs principal each month.
Here is an example $20,000 auto loan amortization table:
| Month | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $377 | $169 | $208 | $19,831 |
| 2 | $377 | $171 | $206 | $19,660 |
| 3 | $377 | $172 | $205 | $19,488 |
| ... | ... | ... | ... | ... |
| 36 | $377 | $196 | $181 | $0 |
- Each month a larger portion of the payment goes towards repaying the principal as the balance decreases.
Carefully review all financing terms and the full amortization schedule before signing your loan agreement. Ask the lender to clarify any points you are unsure about.
Knowing the key financing terminology and payment breakdown helps ensure complete understanding of your obligations when taking out an auto loan.
Getting quotes for financed car insurance
Once you have financing lined up for your new car purchase, the next step is finding the right insurance policy. Here are some tips for getting quotes:
Shop around and get quotes from at least 3 insurance providers. Rates can vary widely, so it pays to compare:
- Local agents
- National insurance companies
- Online insurance marketplaces
Provide all the key details when getting quotes:
- Your personal info like age, driving record, credit score
- Vehicle make, model, year
- Coverage types and limits
- Your lender's information
Emphasize the car will be financed. The agent will know you need full coverage.
Consider the following coverage options:
Collision and comprehensive deductibles - raising these can lower premiums
Gap insurance - covers the "gap" between car value and loan balance
Uninsured motorist coverage
Any discounts available
Review the quotes side-by-side. Compare by:
- Price
- Coverage limits
- Customer satisfaction
- Financial strength rating of the insurer
Choose the most cost-effective policy that meets your needs and your lender's requirements.
| Insurance Company | Annual Premium | Coverage Notes |
|---|---|---|
| State Farm | $1,200 | $500 deductibles |
| Geico | $1,000 | $1,000 deductibles, 10% multi-policy discount |
| Progressive | $900 | $1,000 deductibles, gap insurance included |
- Ask the agent questions about the quote details to make sure you understand everything.
Getting quotes from several providers ensures you find the best insurance deal for your new financed vehicle. Spend time comparing the options.
Being a safe driver
Maintaining a clean driving record is especially important when you have a financed vehicle. Safe driving can help in two key ways:
- Lower insurance rates - insurers reward safe drivers with lower premiums
- Avoid accidents - prevents damage/injuries which would lead to claims
Here are some tips for being a safe driver with a financed car:
- Obey all traffic laws and speed limits
- Allow extra following distance behind other cars
- Scan ahead to anticipate hazards or slowdowns
- Avoid distractions like phones or loud music
- Do not drive if overly tired, stressed, or impaired
- Use signals for all turns and lane changes
- Check blind spots before changing lanes
- Brake early and gradually to avoid sudden stops
- Drive extra cautiously in poor weather conditions
Also consider:
- Defensive driving course - Brush up on skills and possibly get a discount
- Telematics program - Use a monitoring device for potential discounts
Maintaining a clean driving record over a long period avoids surcharges. Most violations impact premiums for 3 years.
If you do receive a ticket or citation:
- Be honest with your insurance provider
- Enroll in traffic school if available in your state
- Write an explanatory letter to the underwriting department
Being involved in an at-fault accident can significantly increase your premiums due to being considered high-risk. Do your best to avoid accidents by driving defensively.
Lastly, make sure your vehicle is well-maintained and check things like tires and wipers frequently for safety. Following good driving practices protects you, your passengers, and your financed asset.
Changing deductibles to lower premiums
One way to potentially lower your insurance premium for a financed car is to raise your deductibles. A deductible is the amount you pay out-of-pocket towards a claim before insurance coverage kicks in.
- Higher deductibles equal lower premiums
- Lower deductibles equal higher premiums
So you can reduce your total cost by taking on more upfront risk with higher deductibles.
The two main deductibles for a full coverage policy are:
Comprehensive deductible:
- Average is $200-$500
- Covers non-collision damage claims
Collision deductible
- Average is $200-$1,000
- Covers collision damage claims
When evaluating changes to deductibles consider:
- How much you can afford to pay out-of-pocket towards repairs or loss
- Any deductible savings requirements set by your lender
- Whether you have an emergency fund in case you need to pay a higher deductible
| Deductible Scenario | Premium |
|---|---|
| $500 comprehensive $1,000 collision |
$1,200 annually |
| $1,000 comprehensive $2,500 collision |
$950 annually |
In this example, raising the deductibles saves $250 per year. But the driver would pay more out-of-pocket if they need to file a claim.
Discuss options with your insurance agent. Ask for quotes with different deductible combinations. Just ensure you meet any minimums set by the lender.
Carefully evaluate your finances, risk tolerance, and lender requirements when choosing deductibles. Higher deductibles can lead to significant premium savings in some cases.
Understanding all terms of financing agreement
Before signing any paperwork for an auto loan, it is critical that you thoroughly understand all the financing terms and the full loan agreement. These documents contain important details that can impact your financial obligations over the life of the loan.
Key areas to review and understand include:
Interest rate - Confirm the exact rate and whether it is fixed or variable over the term. Variable rates can increase your payments.
Fees - Documentation fees and other charges should be clearly disclosed.
Prepayment penalties - Will you incur any fees for paying off the loan early?
Late payment fees - Know the grace period and exact late fee amounts.
Insurance requirements - Understand all required coverages you must maintain.
Default clauses - Review events that allow the lender to call the full loan amount due or repossess the vehicle.
Also understand the full amortization schedule:
Monthly payment amounts
How much goes to interest vs principal each month
Impact of any balloon payments
Do not rely solely on verbal explanations from the lender. Carefully read the loan contract, and ask questions about anything you find confusing before signing. Consider having a third party review the paperwork as well.
If possible, get pre-approved for financing from your bank or credit union before going to the dealership. This allows you to secure better loan terms in advance rather than accepting the dealer's financing.
Taking the time upfront to scrutinize the loan agreement protects you from surprises. Do not let a rushed process obscure important details that can significantly impact your financial obligations when financing a vehicle. Leave no question unanswered before driving your new car off the lot.
Thoroughly examining and comprehending the full financing agreement is a vital step to make an informed decision on any auto loan.
Conclusion
Financing a vehicle through an auto loan allows you to purchase a car you may not be able to buy outright. However, it also comes with important insurance and financial obligations.
When financing a car, be prepared to get full coverage insurance including collision and comprehensive to protect the lender’s interest. Carefully review all required coverages in your loan agreement. Shop multiple providers to find the best premium rates.
Also take time to scrutinize the complete loan terms and amortization schedule. Do not sign anything until you fully understand the financing agreement and your responsibilities. Ask the lender questions and get clarification on any unclear details.
Meeting all requirements of your auto loan ensures a smooth process as you finance your new car. Do your due diligence upfront to make the best financial decision.
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