When buying a car, the most daunting task for many is arranging for a car loan. There are several sources out there for auto financing. The best source for you depends largely on your credit history and where you'll be purchasing the car. Let's look at the pros and cons of each option.
Car dealer financingBut you should be aware that this low interest rate loan is generally only available to those with an excellent credit history. If you have a few bad marks on your credit report, you can usually still obtain dealer financing but it is typically at a much higher interest rate.
With many dealers offering low interest rates or no interest rates at all, this seems to be a very popular option for many people, particularly when they are buying a new car.
If you are considering buying a used car, "buy here, pay here" lots are another option. However, the auto financing options they offer are usually much more expensive than a well-known car dealership. It is not unusual to pay 18% interest for a car loan from one of these dealers. Over the life of the loan, this adds up to thousands in additional payments.
A bank is also a great source for auto financing as long as you have a good credit history. Banks typically have strict lending guidelines and rarely loan money to a borrower with bad credit. For those who already have a relationship with the bank, obtaining a car loan can be quite simple. In fact, some customers are so confident of the relationship, they will buy a car over the weekend with a check and then call the bank to arrange for financing to cover it on Monday. Of course, only the bank's best customers are able to do this.
Credit unions only lend money to their members. In order to be a member of a credit union, you must pay a membership fee and belong to a certain group. For instance, many towns have a teacher's credit union where the only members are teachers and their families. Credit unions can offer great rates to their members for auto financing.
Paying cash for car
If you're lucky enough to be able to pay cash for a car, congratulations! But assuming you have excellent credit, you should check out low or no interest financing options before you empty your savings account. If your money is earning more in interest than the interest rate on your vehicle, it could be a smart option to finance the car rather than pay cash upfront.
Of course, many buyers would love to know that they are driving around in a car without the worry of making monthly payments. Be sure you can comfortably live without the cash if this is the option you choose.
If you are buying a used car from another person, there is always the possibility of seller financing. In this scenario, the person who you are buying the car from finances the car for you. Each month, you will make your payment to the seller. The interest rate on this type of deal will generally be much higher than other auto financing options available. There are also very few sellers who will be willing to finance the car for you. If you are lucky enough to find someone who is offering seller financing, be sure to get all of the terms in writing to avoid a sticky situation later.
Getting a loan online
With the abundance of online lenders, many car buyers are going no further than the comfort of their own homes to shop for auto financing. There are thousands of lenders available online. Because there is so much competition, the Internet generally offers the best car loan rates around. There are also lenders out there for every type of borrower. Online lending is not limited to those with excellent credit. Be sure to shop several websites and compare based on all of the terms of the loan, not just the rate.
Family and friends loans
Some people are lucky enough to be able to turn to their friends or family for loans. Many times these loans carry a minimal interest rate and can be a great car financing option. Be sure that all of the terms are laid out in writing and you are prompt in making your payments. If there is a possibility the loan will cause hard feelings down the road, your best option may be to seek a car loan elsewhere. It is better to pay a little more interest and save your relationship! Perhaps the biggest disadvantage is that this type of loan will not help you to establish credit.
Take out a home loan
If you own your home, you have an additional auto financing option available to you. You can refinance your existing mortgage for more than you owe and get the cash you need to buy the car or you can take out a home equity loan. Either of these options usually offers competitive rates because of being secured by real estate. In most cases, the interest paid for the car loan will also be tax deductible if you itemize. The downside to this auto financing option is if you cannot make the payments for your car, you will also now risk losing your house as well.
As you can see, there are a variety of car financing options. The best option for you depends on your individual situation. Be sure to fully research your options to ensure you get the best deal available!