Auto Financing

Shopping for a car can feel exciting until you’re faced with unfamiliar terms, pricing structures, and financing options. From knowing what a trim level really includes to knowing how warranties, loans, and depreciation affect your budget, understanding the ins and outs of what effects the costs of your car is essential. When I bought my first car, I underestimated how much I didn’t know. With our Auto Financing guide, you’ll be equipped to confidently purchase the best car for you.

Car Shopping Terminology

First, let’s discuss car shopping terminology so you can understand the details of your financing and car options.

Make and Model

A car’s make and model note the manufacturer that produced the car and the specific name of the car. A Chevrolet Equinox has a Chevrolet make and an Equinox model. A model year notes the year that the car had changes made to some standard features. The newest car models typically come out in the year prior to the name. For example, the 2025 Toyota Camry became available for consumers to buy in the spring of 2024.

MSRP

The MSRP found on a window sticker of the car or on the online listing stands for manufacturer’s suggested retail price. This is how much the company (Ford, Honda, Acura, etc.) wants to sell the car for. This number is the same across dealerships.

Trim Level

The MSRP of a car changes based on the trim level. The higher the trim level, the higher the MSRP. The trim level is a term used to define what features and equipment come with that car. There can be several different trim levels for the same kind of car. A Hyundai Elantra SE includes remote keyless entry, dual USB charging ports, and Bluetooth capabilities, while a Hyundai Elantra SEL Sport includes these features plus a hands-free smart trunk, wireless device charging, and push button start.

Blue Book Value

A great third-party opinion to consider is Kelley Blue Book. This company determines what they believe a car is worth by giving it a Blue Book Value. This can help you determine how to negotiate the price of a car, or if the car you want to buy is worth the price.

Factory Warranty

When you buy a new car, they will come with a factory warranty. This warranty is automatically given by the manufacturer and covers the car up to a specific mileage or age. Factory warranties vary from model to model. You can also buy an extended warranty from Alltru or the manufacturer to prolong your coverage.

There are many other helpful terms to know, but these few are crucial. Visit Understanding Car Shopping Lingo for a list of 25 terms you should know.

Buying New vs Used

Before considering your financing options, you should decide if you want to buy a new or used car. Your decision may impact the type of financing you choose. Plus, there are other financial differences between new and used cars that you need to be aware of before researching a new car.

Down Payment

When you purchase a car, whether new or used, you should make a down payment. Generally, the standard is to make a 20% down payment for a new car and 10% for a used car. New cars can also cost significantly more than used cars. Your down payment for a new car can be significantly higher than for a used car.

Depending on the price differences between the cars, your monthly payment could be more for a used car than for a new car. This is because the loan amount varies because of a car’s price and down payment.

Warranty Options

Buying a new car guarantees a factory warranty, like the kind just mentioned. A factory warranty typically overs up to 36 months or 36,000 miles, whichever comes first. If you buy a used car, the car may no longer have a factory warranty.

Features and Upgrades

One of the perks about buying a new car is that you can be selective with the features and upgrades. Many manufacturers let you build a car online with their various trim levels and features, so you can choose exactly what you want in your car. However, when you buy a used car, you have to choose from what is available.

Maintenance Costs

Generally, newer cars cost less upfront for maintenance and repairs since it’s under warranty and the features are newer. The older a car, the more likely it is to be a costly repair. Even though newer cars shouldn’t need as much repair, the newer features and upgrades could be buggy, and cost you out of pocket to fix.

Car Value

Cars depreciate, which means they lose value over time. A new car loses around 9% of its value as soon as it leaves the dealership and will lose around another 20% of its value after a year. You can anticipate your car depreciating around 15% for the next four to five years. Even though the value of the car significantly decreases after one year, you will still owe the same amount of money each month for your loan.

Insurance

The cost of your car’s insurance usually correlates to the MSRP of the car. Newer cars are more attractive to criminals due to their higher worth, which makes it more risky to be stolen. Newer cars also lose their value faster than used cars too.

Car History

When buying a used car, you risk more mechanical issues due to the car’s history. CARFAX will report the number of owners, accidents, and detail repairs made to a car. The downside about this tool is that it doesn’t report personal repair. CARFAX reports should play a role in deciding if you want to buy a particular car, but they should be considered with a grain of salt.

Buying or Leasing a Car

Leasing a car is different from buying a car. No method is inherently better than the other. It depends on your situation and what situation you want to be in now and in the future. Here are some key differences between buying and leasing a car.

Ownership

First, when you lease a car, you do not have ownership of the car when your term is up. You have to return it to the dealership. When you buy a car, you will have ownership of the car at the end of your term. At this point, you are free to keep it or sell it whenever you want.

Upfront and Monthly Costs

Leasing a car generally costs less up front than buying a car. A common practice is to make a 20% down payment for a new car and 10% for a used car when buying a car. However, you usually don’t have to make a down payment to lease a car.

On the other hand, leasing a car will cost more monthly because there was no down payment up front. If you want to how your payments might vary if you have a car in mind already, visit our Purchase or Lease a Vehicle calculator.

New vs Used

When leasing a car, many choose to lease a new car instead of a used car. This guarantee s that you will be under the factory warranty for as long as possible. Factory warranties are granted for purchasing new cars too. However, when you lease a car, you are driving it during its most reliable years. A car that you buy instead could start giving you trouble 5 or 6 years down the road.

Mileage Limits

You will have a limit on how many miles to drive when you lease a car. Exceeding your mileage limit results in high fees. However, if you have a short commute or only drive short distances, leasing could be a great option.

Long-Term Costs

Finally, consider the long-term costs of leasing vs buying a car. When your lease term is up and you have to return the car, you’ll need to lease or buy another car. That means more monthly payments for the next few years. If you purchase a car instead and keep it well maintained, you can keep it running for ten plus years. This means your last several years of owning a car can potentially be payment-free!

Auto vs Personal Loan

Sometimes, an alternative financing option will suit your needs if you are trying to regain control of your finances. While an auto loan is the typical option for financing a car, a personal loan can be a safety net. Here are some key differences.

Collateral

The first major difference between the two types of loans is that an auto loan is a secured loan and a personal loan is an unsecured loan. This means that an auto loan requires collateral, and a personal loan does not. In this situation, the car is the collateral. This means that if you stop making your monthly auto loan payments, your lender can take the car from you. However, this cannot be enforced with a personal loan.

Down Payment

A second major difference is that a personal loan actually doesn’t require a down payment! If you don’t have any money to immediately pay toward a car, you can use a personal loan instead.

Monthly Payments

However, the downside to a personal loan is that your monthly payments will be higher since your loan amount is larger. In addition, personal loans tend to have higher interest rates because there is no collateral. It’s riskier for a financial institution to grant a personal loan than an auto loan. This comes at the cost of higher interest.

Loan Term

Another difference between the two loans is that the loan term lengths can greatly vary. At Alltru, our auto loan term lengths range from 36 to 84 months, but our personal loan term lengths don’t exceed 60 months. If you want to pay off your vehicle in a shorter amount of time, a personal loan could be the solution.

Age and Mileage

Auto loans also have limitations on the age and mileage of the car. If you want to buy an older car, a personal loan could be easier to get approved. However, if the car you want to buy has already been used for several years, it might not be worth the cost of taking out a loan to pay for it.

You’re Ready to Finance Your Car

Finding the perfect car to buy can take time, but financing it doesn’t have to. Now that you have a better understanding of how to finance a car, you can confidently continue your car shopping, whether you’ve found the one you want yet or not. When you’re ready, we’ll be here to help you get those keys in your hands.