You’ve searched and searched and you’ve finally found your dream car. Now you only have one problem: how to finance your car purchase.
Of course it would be nice if you could just pay cash. But if you’re like most car or truck buyers, you need financing.
Knowing your basic financing options is crucial to choosing the automobile financing method that will best suit you. Here’s an overview of the main financing options that might be available to you.
Automobile Loans from Lending Institutions
You can get an auto loan from a credit union, bank, or other financial institution. The car you purchase will be collateral for the car loan. This means the lender can repossess your vehicle if you ever default on the car loan. Car loans are the most popular automobile financing option because they usually offer reasonable interest rates and they are fairly easy to get.
Two factors may affect the total cost of the car loan.
One is the length of the loan. Generally, the longer the loan, the lower your monthly payment will be. But the longer the loan, the more total interest you will pay. If you can afford it, get a shorter term loan. Your monthly payments will be higher, but you’ll pay less money over all.
The second factor that can affect the total cost of your automobile loan is your credit rating. Creditors with a poor credit history usually pay a higher interest rate because of the greater credit risk.
Like traditional auto loans, dealership financing is fairly easy to get. Most car dealerships have relationships with a number of lending institutions, so they can arrange automobile financing even for car buyers with less than perfect credit scores. To compete with traditional bank loans, many dealers offer zero percent or very low interest on dealership loans. However, such loans are available to car buyers with good credit ratings.
Consumer advocates recommend that car buyers get pre-approval on an automobile loan from a bank or credit union before asking the dealership about possible financing. When you already have loan pre-approval you will have the upper hand when bargaining with the car dealership for a better interest rate on a dealership loan.
Home Equity Loans and Home Equity Lines of Credit
If you own your home and have built up equity, you might want to think about getting a home equity loan or line of credit. Home equity loans usually have lower interest rates than credit cards and personal loans. The interest on a home equity loan may also be tax-deductible. Be careful though, as home equity loans or home equity lines of credit use your home as collateral. You need to be sure you will be financially capable of paying the monthly payments, as you don’t want to risk losing your home.
A credit card advance or credit card draft is another way to finance your dream car. Be aware that you will generally pay a much higher interest rate, though, because credit care drafts are unsecured. Financing your automobile purchase with credit cards can also result in hefty penalties if you are ever late on payments or if you ever go over your credit limit.
Now that you know the basics of each automobile financing option, you should be able to choose the financing method that will best fit your needs. It’s time to go buy that dream car!