You will need more than $30,000 to get an average new car. That amount will increase significantly if you opt for a high-end car. With the current economy, it will not be easy to buy a car on a cash basis. Your next best option is car financing.

A car loan can allow you to purchase a car if you are not willing to drain your bank reserves on the spot for a cash payment. In effect, you borrow money from a lender, which you promise to pay back over time, usually with interest. Lenders charge interest in order to make money. The interest rate is the percentage of the amount loaned that you must later pay the lender in addition to the principal amount.

Using a financial calculator, you can determine how the interest rate will affect your monthly payment. For example, a $20,000 loan payable over 60 months at 5 percent interest will set you back $377 per month. Interest rates change dramatically each day. The changes will impact your car payments. It is vital that you shop around for a lender that charges the lowest interest rate.

There are two common types of car financing: direct lending and dealership financing. Direct lending involves a bank, a credit union, or a finance company. You agree with a car dealer to purchase a vehicle and use the loan from the direct lender to pay for your vehicle. You will be able to shop around for the best loan terms before you enter into a contract with your direct lender.

In dealership financing, you work out your loan through the actual car dealer. You will sign a contract with the dealer, agreeing to pay for the car and all associated financing fees over a certain period. Dealership financing is convenient because you deal with only one party: the dealer. In most cases, dealers offer lower interest rates than direct lenders.

When you acquire a car through financing, the lender actually buys the car and lets you use it until you have paid back your loan. You become the owner only after the lender releases the title of the car to you.