Five financing options to consider when buying a new car
If you’re walking into a dealership before researching your auto financing options, you’re already at a disadvantage. Like the price of a car, interest rates are negotiable and depend heavily upon your credit rating. Understanding your options— and in some cases having a check in hand — puts you in control of the transaction from the beginning. It demonstrates the fact that you’ve done your homework, you’re a serious buyer, and you’re ready to make a purchase.
There are several different avenues you could take when trying to secure the funds to purchase a car. You could pay cash, borrow from family, finance it through the dealership, a bank or a credit union. Let’s look at all of your choices and see which one might be the wisest choice for your individual situation.
It’s difficult to see the entire cost of a car disappear from your bank account, but think about this: when you pay with cash, you’ll actually limit the amount of money you’ll spend on a car. With financing, you’re not overly concerned with the final cost, within reason, so you tend to overspend because it’s not coming out of your bank account at one time. If you’re paying cash, you have a hard stop and have to prioritize what’s important to you. Cash avoids a monthly payment and saves you the additional cost of five years of interest. Best of all, a cash purchase will likely allow you to negotiate a better purchase price.
2. Family loan
Borrowing money from family or friends sounds may be a smart option, especially if your credit score has fallen on hard times. The people closest to you may be more willing to help than a bank, in this case. Problems may arise, however, if the loan payments are not made on time or are unable to be made at some point in the future so be sure to plan for those scenarios. Draw up formal documentation with loan repayment dates, interest charges, and a detailed plan for defaults. The loan should be viewed with the same importance as any other financial obligation.
3. Bank loan
A bank can offer some competitive rates in financing a car loan, especially if you have a higher-than-average credit rating. While the bank is an especially convenient option—multiple branch locations, close to home, online account management— banks tend to have very conservative loan policies and can be very choosy about whom they offer their best rates. Some banks offer a discounted interest rate if you have other banking products through the same bank. For example, many offer a .25% interest rate discount if you agree to automatic bill pay for your car payment each month.
4. Credit Union loan
Credit Unions and banks have similar loan processes, but you may have a better chance of getting approval if your credit isn’t exactly stellar. Credit unions are more apt to listen to your individual situation and make adjustments as they see fit. Interest rates are comparable and they offer a more personalized, relationship-based service. Credit unions work hard to provide a very high level of customer service. Talk to a dedicated professional openly and honestly about your financial situation, flexible repayment plans and any other concerns you may have about your potential loan. The credit union is truly working with your best interest in mind. Most credit unions offer an educational and resources center with information on the different types of finance options, among other topics, and how to make the best decision possible.
5. Dealership loan
According to the Consumer Financial Protection Bureau, “when consumers finance an automobile purchase from an auto dealership, the dealer often facilitates indirect financing through a third party lender.” The dealership generally offers you a higher interest rate than the bank or credit union would in order to make money from the loan. This is typically called the “dealer markup” and it can make the loan very expensive. Yes, a loan from the dealership is quick and convenient, but it’s likely the most expensive auto loan option you’ll have. If you’ve done your homework and you’re up for a challenge, you may be able to negotiate the initial interest rate offer from the dealership, so be sure you come prepared!