Automobile financing refers to the concept of paying for the purchase or lease of a motor vehicle by means other than cash.

The most common types of financing are as follows:

1. Conventional Car Loan - The buyer arranges with a bank or credit union to supply the funds needed to purchase a vehicle from a dealer. Alternatively, dealers can arrange loans for customers through "captive" Auto financing companies, such as those who are affiliated with car manufacturers. Examples are GMAC, Ford Credit, and American Honda. See Car Loans Explained.

2. Balloon Car Loan - A balloon loan is much like a conventional car loan except that monthly payments are lower and a large "balloon" payment is due on the last month. The balloon payment must be paid in cash or refinanced as a new loan. Some balloon loans are structured much like a lease, in that the customer is allowed to return his vehicle at loan-end in lieu of making the final payment. Balloon loans are not offered by all finance companies.

3. Car Lease - Leasing is a method of financing which only pays for a portion of a vehicle's value. Leasing is alternative to financing a vehicle's total value, as is the case with a conventional auto loan. Lease payments, which are based on a vehicle's expected depreciation, are significantly lower than loan payments. Vehicles that depreciate at a slower rate make the best lease deals.

There are many sources for financing an automobile. Banks, credit unions, Internet-based finance companies, and auto manufacturers (actually their associated financial divisions) are all potential sources. Online sources make it easy to compare and shop for the best rates. Check with Bankrate for national rate averages.

Loan rates are based on borrowers' credit scores. Customers with low (subprime) credit scores pay the highest rates. Scores range from 300 to 850, where 680 and below is generally considered to be subprime.You should always know your FICO credit score before considering car financing. See Bad Credit Car Loans and Leases.

It's always better to arrange you own car financing with a bank or other non-captive source before asking about dealer financing. Doing so will give you a source of comparison for the financing that a dealer may offer. It's not ususual for dealer financing to be the better choice. This can happen when the auto manufacturer is offering low finance rates during promotions.

For more information, see: The Lease Guide

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