For many people, purchasing a car is a major decision. Taking out a loan to make the purchase can mean a financial obligation that will affect you for years to come. The most common mistake consumers make is walking into a dealership uninformed and walking out paying a lot more than they should for their vehicle. Before you consider buying a new car, here are five financing options that you may want to take a look at:
1. Commercial Bank Loans – Commercial banks offer a great alternative to acquiring financing at the dealership. Having your financing in place before even setting foot onto the dealership’s lot will take much of the stress out of purchasing a new car and will prevent you from being taken advantage of by oftentimes predatory financing tactics commonly encountered at the negotiating table.
2. Captive Finance Company Loans – A captive finance company is a lender which only provides financing for its parent company. This practice is standard in the automotive world, as most of the major manufacturers like General Motors and Ford have their own in-house financing options. The purpose of these lenders is to encourage consumers to purchase their specific brand of vehicles, and often run promotions such as 0% interest for qualified consumers. Overall, the rates provided by captive finance companies will be less than standard commercial banks because the profit is made by the sale of the vehicle, not just on loan interest.
3. Secured Auto Loan – A secured auto loan is financed by assets such as your nest egg or even another, paid-off vehicle. Lenders are likely to give more favorable rates when their loan is protected by something with value in the case of default. Interest rates for secured auto loans will be less than traditional vehicle financing options.
4. Home Equity Line Of Credit – A home equity line of credit (HELOC) is one of the most effective ways to get a low-interest car loan. If you own your home and have established equity in it, most lenders will be willing to provide you with a HELOC, drawing on the wealth you’ve built up in your property. There is no need to sell or refinance your home as lines of credit act as a second mortgage until paid off. Most HELOCs feature interest rates that are slightly higher than a standard home loan, but often significantly less than other auto loan options.
5. Buy-Here Pay-Here – Car dealerships which offer a buy-here pay-here or “dealer financing” way of purchasing your new car are a great asset for some consumers, but should be widely avoided if you are able to obtain financing from other sources. The advantage of buy-here pay-here dealerships is that it is almost certain that you’ll be able to get your purchase financed as long as you have a stable work history and meet their other minimum requirements.
The downside of this time of arrangement is that the dealerships often charge a much higher rate of interest, sometimes 20%+, on your vehicle. The repayment terms are normally shorter as well, commonly between 24 and 36 months. Another common requirement is full insurance coverage on the vehicle, an expensive which can also be quite costly. This should be the last resort if you’re looking at financing options, but is useful for consumers that are not able to obtain a traditional loan.
There is no doubt that financing a car can be a costly mistake if not done carefully. There are a number of options out there for consumers trying to obtain a loan and some make more sense than others. Depending on your financial situation some methods will provide you with a great way to afford the car you want, while other methods may cause you to dig a financial pit that can be hard to escape from. Careful consideration should always be taken before signing on for any type of financing, especially on high-interest vehicle loans.
David Lye has vast experience with both cars and finance. David is the founder of http://fincar.com.au. He enjoys sharing his knowledge to help others save money when financing auto purchases.