If you need a new car, your first concern is probably how you’ll pay for it. When it comes to buying a vehicle, you have three main choices to help finance your purchase. Here are your auto loan financing options and the pros and cons of each option.
Any car dealership you visit will offer financing to help you pay for the car. Each dealership works with a lending institution that can create auto loans for customers when they decide to purchase a car. The total amount of the loan depends on the price of the vehicle plus related expenses, like sales tax, title and licensing fees.
There are several things you’ll need to negotiate when financing through a dealership. The first is the price of the vehicle. Then, you’ll have to decide how quickly you’ll pay of your car – most loans are from three to five years. While longer loan terms lead to smaller monthly payments, you’ll also end up paying more in interest, so it’s wise to pay it off as quickly as possible. After negotiating loan terms and monthly payments, you’ll also want to make sure you get a good interest rate on your auto loan. Finally, the amount of your down payment will also have to be decided – naturally, a larger down payment will help you pay off the vehicle faster.
You won’t technically own your car right away when you utilize dealership financing. Instead, the lender holds the car’s title until you’ve completed all of your payments. This is a convenient way to secure financing for a car, but it can also lead to bigger monthly payments and higher interest rates compared to other options.
Getting a loan from an outside source before you go to the dealership can make the process of buying a car a bit simpler. That’s because it allows you to negotiate for only the price of the car without factoring in a down payment, a monthly payment and an interest rate, giving you a better idea of what you’ll actually be spending.
When choosing an outside source to get your loan from, you can begin by checking with options at your bank. In addition, there are numerous lending institutions which offer pre-approved loans. A great place to start is E-Loan or Lending Tree, both of which show you several lenders’ rates for you to compare. Once you’re approved, you’ll be given a credit limit (the maximum amount they’ll loan you to help pay for a car) along with a check that you can make out to the dealership at the time of purchase.
As with dealership financing, the lender holds the car’s title until you’ve completed all of your payments when you use a pre-approved loan. However, this option makes it easier to find a car you can afford since you already know what amount of money you’ve been approved for and how you’ll be paying for it.
Home Equity Loans
Home equity loans are a less common, but practical choice for many new car buyers. By getting a home equity loan, you can often get a great interest rate. Another major bonus is that the interest on the loan could be tax deductible. However, you should only choose this option to finance the purchase of a car if you are financially stable since failing to pay back the loan could put you in danger of losing your home.
Buying a car can be overwhelming if you’ve never done it before. To make the process a bit easier, create a budget to determine what you can afford for a down payment and for monthly payments. Use that information to ensure that you don’t end up getting over your head regardless of which of these auto financing options you choose.
(Also read: Buying vs. Leasing A Car: The Pros & Cons Of Each.)