Like purchasing a home, buying a car is an emotional and sometimes spontaneous process. When a car shopper finds that “perfect vehicle,” the aspect of financing it can lead to murky waters. At times the borrower can be left confused and unsure of what he or she agreed upon in terms of loans and payments. Understanding auto loan financing options can assist the borrower with determining which type of auto loan best suits his or her financial situation. Before entering a dealership or speaking with a seller, borrowers should have a specific budget in mind, a ceiling price and a finance plan with a reputable lender.
Where to Get Car Finance
Buyers can obtain auto loan financing from a variety of sources, however walking into a dealership after being pre-approved for a loan provides the buyer with negotiating power. Loan pre-approval also removes some of the emotional aspect of buying a car because the buyer knows how much he or she can spend and budget into the monthly expenses. From financial institutions to dealerships, car buyers have a variety of options for financing:
Bank Car Loans: Banks often offer competitive car loan rates and typically have conservative loan policies, usually extending car loans to those with good to excellent credit. Banks sometimes offer special rate discounts on auto loans for customers who have several accounts with the institution or may advertise a special rate as a promotion.
Credit Union Car Loans: Credit unions offer competitive car loan rates because of low operating costs and a non profit status. Credit unions lend money only to members and, like banks may offer rate discounts to members with a deep financial relationship or on a promotional basis.
Finance Companies: Typically less conservative than banks, finance companies are derived from the automaker such as Ford Credit or GMAC. However, to cover risk finance companies typically have higher car loan rates.
Car Loans from Dealerships: Dealers usually work with borrowers from all credit ratings but, like finance companies, often have higher car loan rates. The biggest benefit is convenience—borrowers can obtain financing on the spot while purchasing the vehicle.
Car Loan Types
Car buyers can take a few different routes to finance their new or used car purchase. Whether the borrower wants to refinance his or her auto loan or if the borrower has poor credit and a standard auto loan won’t work, most financial institutions offer a few different auto loan types to accommodate a variety of borrowers.
New Car Loan: Financing for a new car is readily available through most financing outlets such as dealerships, financial institutions and finance companies. Most lenders provide auto loan pre-approval, competitive rates based on credit score and 100% financing. Terms are typically 36, 48 or 72 months.
Used Car Loan: Borrowers can obtain a loan from a variety of lenders for a used car purchased from either a dealership or from a private party. Financial institutions and dealerships usually handle used car loans and some home owners will finance the purchase of a used car using a home equity loan. The benefits of a home equity loan include competitive rates and tax benefits. Traditional used car loan terms are typically similar to those applied to a new car loan.
Car Refinance: Car owners who are interested in lowering their monthly auto loan payment or those who are upside down in their loan may considering auto loan refinance. Many financial institutions offer competitive auto loan refinancing offers and borrowers should shop several institutions before deciding on a loan.
Own or Lease?
Some dealerships tout low monthly payments if the buyer leases the car. Although the payments may be low, leasing may not be for everyone. Before signing a leasing contract, car shoppers should consider the differences between leasing versus buying:
Car Ownership: Car owners can have the car as long as they want, whereas leasers must return the car to the dealership on the agreed upon date.
Initial costs: When purchasing a car, buyers must provide the cash price or down payment, taxes and registration. Leasers typically only need a refundable security deposit, down payment, taxes and the first month’s payment.
Monthly payments: Buyers typically have higher monthly payments than leasers because the buyer is paying off the entire purchase price.
Mileage: Leasers must watch their mileage because most agreements include a maximum number of miles they can drive during the term.
Term ending: At the end of the loan term, buyers own the car outright, whereas leasers must finance a new car.
Car Value: Buyers have to consider the car depreciation, whereas car value has no impact on leasers because they have no equity in the car. “Car Buying Advice.” Consumer Reports. April 2010.