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So, what does it mean to finance something? Financing means borrowing money to buy something that you can’t afford to buy outright. You could finance an expensive purchase like a car, or smaller items like clothes and electronics. But what is the process of financing? How does it work? How can CreditAssociates help? We’ve got the answers to all these questions and more.

What Is Financing?

Financing is borrowing money from a creditor to pay for something now by setting up a plan to pay for it over time. Sometimes financing will require a lot of information and paperwork, but other times you can just apply for financing in a store and get approved immediately. However, it’s important to note that if you don’t have a good credit score you might not qualify for financing or your options might not be as great. 

Financing and Debt

When you finance something, you will be taking on debt to pay for something now. Debt will fall within one of two categories: secured or unsecured.

Secured Debt

Secured debt is a loan that is backed by something that is of value, such as property, cars, or cash. In this loan, the creditor will have the right to take the property if you are unable to make payments on your loan according to the terms. This type of debt is very common with mortgage and auto loans.

Unsecured Debt

Unsecured debt is when you are not backing the loan with anything that the debtor can seize if you are unable to make payments on the loan. This doesn’t mean that your assets aren’t at risk, but just that creditors will be limited in what actions they can take unless they take legal action. Common types of unsecured debt are credit cards, medical bills, and private student loans.

How Does Financing Work?

When you finance something, you will need to get a financial institution to loan you the money you need to make your purchase. You will then typically pay the lender interest and additional fees in exchange for borrowing that money. The benefit to financing is that it could help you get an item or service  and pay for the cost over time instead of having to pay for everything upfront. The downside to financing a purchase is that you will typically pay more over the life of your loan, due to interest charges, than if you were to buy the item outright. Your financing options can also be less advantageous if you don’t have good credit.

What Can You Finance? 

Financing can be used to purchase almost anything, from a car to your education. However, companies and banks may have restrictions on what types of items they will finance and your specific options will be based on your personal credit. This is due to increased risk on what they finance.

Is Financing a Purchase Right for Me? 

Financing a purchase can be beneficial for some, but it can also come with risks. Before you finance something you need to know the terms of your loan, such as payment amount, repayment period, and interest rates, as they can play a role in determining if financing a purchase is a smart decision for you.

Pros of Financing

Financing can help you increase your purchasing power to help you buy something that might otherwise be out of reach. You may not be able to pay for something all at once, but you could afford to make smaller monthly payments on the item. If you’re able to keep up with the loan payments, financing something could also benefit your credit score because it could help build your credit history and demonstrate that you are reliable when it comes to paying off your debts.

Cons of Financing

It’s important to consider a few things before financing a purchase. The primary question you should consider is: can you afford the monthly loan payments?  If not, and you fall behind on your payments, your interest rates can increase, your credit score can decrease, and you could be subject to late fees, all of which can cause problems for any financing you may want in the future. It also may cause cash flow problems if you regularly divert too large of a portion of your monthly income toward paying off what you financed.

10 Financing Terms to Know

Annual Percentage Rate

The rate that you will be paying in interest on the loan you are taking out. 

Collateral

What you’re backing your loan up with. This is the extent to which your lender may take your assets if you are unable to pay off the loan.

Cosigner

An individual who can be held responsible for a loan, but is not entitled to take any benefits from what is purchased with the loan.

Default

When you are unable to make payments on a loan over a certain period of time.

Down Payment

The initial amount that you pay upfront on the loan.

Lien

A claim by lenders that they have a right to certain assets that can be used to satisfy a debt.

Line of Credit

A borrowing limit that a lender will set that an approved individual can use at any time. The approved individual can take out the money as they need it, up to their preapproved  limit.

Loan Terms

The details of the loan that is being taken out. Can include things like interest rates, amount to be loaned, length of the loan, monthly payment, and additional fees that can be charged by a lender.

Maturity

The date that the loan will end is either because it will need to be renewed or it will no longer exist.

Refinancing

The action of changing the terms on your loan, typically done to help the borrower secure more favorable terms and percentage rates for their loan.

How Can CreditAssociates Help?

If you’re struggling to qualify for financing, we recommend you work to reduce your debt. If you’re feeling overwhelmed by the amount of debt you have, don’t worry, you have options. We can provide you with a personalized debt relief plan that could help you become debt-free for less than you owe. Call 1-800-983-6693 today, for a free consultation with one of our debt experts who can help you get started today. Need to read more first? Check out “how it works” here.

Common Questions About Financing:

Is financing the same as a loan?

When you finance something you are essentially taking out a loan. Financing and taking out a loan both involve borrowing money to pay for something upfront and paying back what you borrowed over time, plus interest and other fees.

What does it mean to finance a house?

Financing a house is when you borrow money from a lender to pay for the house you are purchasing. This is called a mortgage loan. You then will be expected to make monthly payments on that loan to the lender until the loan is paid off. The longer it takes you to repay your loan, the more you will typically pay in interest fees. If you miss mortgage payments, you could be putting your home in jeopardy of being seized by the lender.

Does financing a car build credit?

Financing purchases, such as a car, could help build your credit. If you make all of the monthly payments on time, then this can help boost your creditworthiness with lenders when they evaluate your credit score.