Did your beloved truck finally stall out for the last time? Do you want to upgrade from your ’05 Corolla to something that’ll let you jam out to more than just your old mix CDs?.
If you want to buy a new car, you might think that getting a loan is the best way to go. In fact, 79% of new cars were financed in 2023. 1.
But what does financing a car mean, and is it really the best choice for you? We’re here to tell you the truth about financing a car and how much it will really cost you.
When people don’t have enough cash to buy a new or used car all at once, financing is a common way for them to do it. But financing can make some buyers confused about who owns the car. So does getting financing mean you own the car?.
The short answer is no. When you finance a car purchase, the lender technically owns the vehicle until you finish paying off the auto loan You don’t gain ownership until the loan is fully repaid, even though you’re the one driving it day to day
How Car Financing Works
Financing a car means you’re taking out an auto loan to cover the purchase price, rather than paying cash. Here’s a quick rundown of how the financing process works:
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You pick out the car you want and negotiate the sale price with the dealer This becomes the amount you’ll borrow,
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You apply and get approved for an auto loan. The lender will require a down payment, usually 10-20% of the vehicle’s price.
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You sign a loan contract agreeing to repay the borrowed amount plus interest in monthly installments over a set period of time, typically 3-6 years.
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The dealer gets a check from the lender for the remaining balance owed on the car after your down payment.
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You drive off the lot in your new car! The lender now has a lien on the title until you finish repaying the loan balance.
So in car financing, the lender is providing the funds needed to actually buy the vehicle on your behalf. Until the loan is satisfied, they hold ownership rights while you hold possession rights.
Registering and Insuring a Financed Car
Although the lender technically owns a financed vehicle, the car still needs to be registered and insured in your name.
Registration is legal proof that you are allowed to drive the car. Having valid registration is required to drive on public roads. The “registered owner” name goes on the title of a car that you have a loan on when you register it. “.
You also must purchase auto insurance to cover liability, collisions, comprehensive damage, and other risks. The lender will stipulate minimum insurance requirements you must meet. As the primary driver, the insurance policy must be in your name.
Even though you don’t legally own the car until the loan is paid off, you can legally use it until then as long as it’s registered and insured.
Responsibilities With a Financed Car
When you finance a car, you take on all the usual duties that come with owning a car, such as:
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Making Loan Payments – You are obligated to make the agreed upon monthly payments on time until the auto loan balance reaches zero. Late or missed payments can lead to penalties and negative credit impacts.
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Registration Renewal – You must keep registration current by renewing it periodically per your state’s requirements. Letting it lapse can result in fines or the inability to legally drive the car.
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Insurance – Continuous auto insurance coverage is mandatory. If you allow policies to cancel due to nonpayment, the lender may get force-placed insurance at a higher cost passed on to you.
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Maintenance – As the vehicle operator, you must keep up with regular maintenance and repairs to keep it in good working order. The car is collateral for the loan, so the lender wants to protect its value.
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No Sale or Transfer – You can’t sell or transfer ownership of the car to someone else until the loan is satisfied. The lender must first be paid off before releasing the lien.
Although you don’t own the car outright, you have all responsibilities as if you did during the loan term. Failure to uphold your obligations can put the financing at risk.
What Happens if You Default on the Loan?
Defaulting on an auto loan has serious consequences. If you fall too far behind on payments, the lender can repossess the vehicle and then sell it to recoup their losses.
Repossession involves the lender hiring a recovery company to seize the car from you. They are allowed to do this because officially they still own the car until the loan is paid in full. Depending on local laws, they may be able to repossess with no notice once payments are a certain number of days past due.
The lender will then sell the repossessed car at auction. They’ll use the sale proceeds to cover the remaining loan balance you owed, plus fees involved with the repossession. If there’s any money left over, you would get that as a refund. But often there’s still a deficiency, meaning you still owe additional money even after the car is sold.
Defaulting and repossession also badly hurts your credit standing that can take years to recover from. It makes it very hard to qualify for future loans or lines of credit.
Benefits of Paying Off a Financed Car
Once you successfully make your last loan payment, the lien against the vehicle gets released. At that point:
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You Officially Own It – Full ownership and title transfers over to you. There are no more restrictions on selling or otherwise disposing of the car.
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No More Monthly Payments – Your budget gets freed up now that the car payment is eliminated. That’s extra money you can put toward savings, other goals, or simply keeping in your pocket.
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Loan Displayed as Closed – The satisfied auto loan switches to a closed status on your credit reports. This can give a boost to your credit scores.
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Equity Can Be Tapped – Now that you fully own the vehicle free and clear, its value can be tapped into if needed, such as taking out a car title loan. This allows access to fast cash.
Paying off a financed car early can accelerate these benefits. There’s no penalty for prepaying auto loans, and doing so saves on the amount of interest paid over time. Even just making an extra principal payment each month can knock out a loan years sooner.
Other Ownership Scenarios
Financing isn’t the only situation where car ownership gets a little complicated:
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Leasing – With a lease, the leasing company owns the car. You simply rent it for a fixed term and mileage allowance per your lease agreement. You must return the car once the leasing period ends.
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Co-signing – When you co-sign an auto loan, you help another person get approved for financing but are also equally responsible for making sure the loan gets repaid. Your name goes on the car title until the loan is satisfied.
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Living Trust – Cars can be titled under a living trust instead of individual ownership. This may provide certain legal protections but doesn’t change who is ultimately responsible for the loan.
The common denominator is that a third-party lender maintains a stake in a financed vehicle. Only once the loan gets paid off does unencumbered ownership transfer over to the buyer. So if you’re financing a car purchase, you won’t actually own it free and clear until the last loan payment is made.
Is It a Good Idea to Finance a Car?
Nope, it’s not a good idea. In fact, it’s a horrible idea.
Listen, we get wanting to have a nice car (or even just a reliable car). But when you do the math, you’ll see that financing a car isn’t worth it. Not only does a monthly car payment rob you of your ability to build wealth, it also steals your peace.
That $700 car payment is $700 you’re not saving or investing for your future. And that payment weighs heavy on you every single month. And for what—to impress the parents in the carpool line?
The truth is, you don’t have to take out a car loan to get a good car or even get your dream car (more on that in a minute). Just imagine how free you would feel if you didn’t have a car payment holding you back!
How to Get a Car Without Financing
So, how do you make that dream car your reality (without the nightmare of a car payment you can’t afford)? You save up and buy a car with cash.
Here’s how it works: If you were to save $726 (the average new car payment) for just one year, instead of giving it to the dealer, you’d have $8,712.6 With that money, you can buy a dependable used car with straight cash! And if you were to drive that car for a year and keep saving that $726, you’d have another $8,712 plus the trade-in value of your car.
Keep saving and upgrading your car along the way (if you really need to), and before you know it, you’ll have enough to pay cash for that 4Runner. But if you had financed that car, you’d still be paying some hefty monthly payments (plus interest) to the dealership.
It’s time to stop dreaming about a car and start saving. Your first step is to create a budget and be intentional about putting money away. Every. Single. Month.
And saving is easy with the sinking fund feature inside our free budgeting app, EveryDollar. Youll set your total savings goal, plan what to set aside each month, and track it—so you can watch those car savings grow!
Leasing vs. Buying a Car: Which is the Better Option for YOU? | Your Rich BFF
FAQ
Does financing a car mean you own it?
Car financing is when you take out a loan to help pay for your vehicle. You’ll usually make monthly payments on the loan, and the car is yours once it’s paid off. One of the benefits of financing a car is that you’ll own it outright, so you can do what you want with it.
Do I have a title if my car is financed?
You typically receive the title to your car after you pay off your loan. When you finance a vehicle, the lender holds the title as collateral until the loan is fully paid.
When you finance a car, who is the owner?
In most states that means the lender holds the car’s title and is considered the vehicle’s legal owner until the loan is paid in full. The lien protects the lender and allows them to repossess the car if the borrower stops making payments. When you finance a car, you typically make monthly payments to the lienholder.
What’s the difference between financing and owning a vehicle?
Buying a car means you pay for the full cost of the car in cash, whereas financing a car means you purchase the vehicle with a loan and pay it off over time. When you buy or finance a car, the car is yours to keep for as long as you want.