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Listerhill Credit Union (en-US)

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What is Auto Financing?

What you need to know before buying your next car.

Editorial Note: Articles published are intended to provide general information and educational content related to personal finance, banking, and credit union services. While we strive to ensure the accuracy and reliability of the information presented, it should not be considered as financial advice and may be revised as needed.

Everyone thinks about their next new car months before making a final purchase, but few people consider whom they should finance through or what that process will look like. Don't panic. Auto financing does not need to be stressful or confusing. Read below to learn more about what auto financing actually is and why you should care about it.

What is Auto Financing?

Auto financing is any sort of loan designed to help you purchase a vehicle.
When shopping for a new car, most people don’t have the cash needed to pay for the entire amount all at once. For this reason, many buyers will secure auto financing to fund their purchase.

With an auto loan, you make monthly payments based on the loan amount plus interest. Once the entire loan is paid off, you own the vehicle.

Financial institutions, such as banks and credit unions, offer auto financing to their customers and members. You can also get auto financing through car dealerships. Let's explore both options below.

Direct Financing (Financing with a financial institution you trust)

With direct financing, you have more options and more control over the financing process. This is because you are able to negotiate the loan’s terms directly with the lender. While this may be less convenient than dealership financing, you have a better chance of getting lower rates and a payment plan that works for you.

In addition, you can get pre-approved for financing before you even start car shopping. The advantage to pre-approval is you will have a good idea of how much you can afford before you even start shopping for a car.

Although it might not be instantaneous, we recommend applying for auto financing through a local financial organization that you know and trust before you begin car shopping so that you can plan your budget wisely.

Dealership Financing

If you choose to get auto financing from the dealership, you’ll start off by choosing a vehicle and then seeing what type of loan you qualify for. The dealership will forward your information to lenders they partner with to obtain quotes on rates. Then they’ll offer you the financing options they receive, and you’ll choose the loan that best fits your needs.

Be aware that if you opt for dealership financing the dealership may increase the rate to boost their own profit. If the quoted rate seems a little high, negotiate for a lower one. In many cases, you’ll still end up with a slightly higher rate than you’d get directly from a lender, but negotiating for a lower amount could help offset that.

How Auto Financing Loan Terms are Determined

After examining your financial information, your lender will determine what kinds of loan terms you qualify to receive. The different terms include the interest rate, loan life, and monthly payments.

Interest Rate

Your interest rate depends largely on your credit score. The higher your credit score the lower the rates you’ll be offered. The rate may also be increased or decreased based on other loan terms, such as the loan’s life.

Life of the Loan

The life of the loan is simply the duration. Most auto loans last between 36 and 84 months, or three to seven years. Longer loan terms mean lower monthly payments, but ultimately you’ll pay more in interest. A longer life may also mean a higher annual percentage rate (APR) in general, further increasing the end costs.

A shorter auto loan life will typically have lower rates, and you’ll pay less in interest since the loan is paid off sooner. However, you’ll have higher monthly payments; so, if your monthly income is low, you may not qualify for shorter loan lengths.

Monthly Payments

Your monthly payments are calculated based on the total amount of the loan, the loan life, and the interest rate. The total plus interest is divided by the number of months in the loan for a consistent monthly payment.

Those with a higher monthly income can tackle larger payments, whereas those who have more limited funds will need financing with lower monthly payments and a longer loan life.

Auto Financing - Final Considerations.

Auto financing seems intimidating, but we promise it's more approachable than you think. Just remember to look at financing options with a financial institution you trust. Whomever you choose will be servicing your loan, so you want a lender that provides quality member service in addition to favorable loan options.

Shop around to find the institution you’re most comfortable with and take your time building an auto financing plan that is right for you.

Learn more from these auto financing resources:



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Frequently Asked Questions

  • What happens when federally insured credit unions merge?

    If a member has accounts in credit union A and credit union B, and credit union A merges into credit union B, accounts of credit union A continue to be insured separately from the share deposits of credit union B for six months after the date of the merger or, in the case of a share certificate, the earliest maturity date after the six-month period. In the case of a share certificate that matures within the six-month grace period that is renewed at the same dollar amount, either with or without accrued dividends having been added to the principal amount, and for the same term as the original share certificate, the separate insurance applies to the renewed share certificate until the first maturity date after the six-month period. A share certificate that matures within the six-month grace period that is renewed on any other basis, or that is not renewed, is separately insured only until the end of the six-month grace period.

  • What happens if a federally insured credit union is liquidated?

    The NCUA would either transfer the insured member's account to another federally insured credit union or give the federally insured member a check equal to their insured account balance. This includes the principal and posted dividends through the date of the credit union's liquidation, up to the insurance limit.

  • If a credit union is liquidated, what is the timeframe for payout of the funds that are insured if the credit union cannot be acquired by another credit union?

    Federal law requires the NCUA to make payments of insured accounts "as soon as possible" upon the failure of a federally insured credit union. While every credit union failure is unique, there are standard policies and procedures that the NCUA follows in making share insurance payments. Historically, insured funds are available to members within just a few days after the closure of an insured credit union.

  • What happens to members with uninsured shares?

    Members who have uninsured shares may recover a portion of their uninsured shares, but there is no guarantee that they will recover any more than the insured amount. The amount of uninsured shares they may receive, if any, is based on the recovery of the failed credit union's assets. Depending on the quality and value of these assets, it may take several years to conclude recovery on all the assets. As recoveries are made, uninsured account holders may receive periodic payments on their uninsured shares claim.

  • What happens to my direct deposits if a federally insured credit union is liquidated?

    If a liquidated credit union is acquired by another federally insured credit union, all direct deposits, including Social Security checks or paychecks delivered electronically, will be automatically deposited into your account at the assuming credit union. If the NCUA cannot find an acquirer for the liquidated credit union, the NCUA will advise members to make new arrangements.

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