In a perfect world, you'd pay the full price in cash without blinking. But if you're like the seven out of ten car and truck buyers who don't live in a perfect world, chances are you'd be paying for your car through one of several financing schemes.
Understanding the basics of each car financing option is key to choosing the automobile financing strategy that best suits your situation. Here is an overview of auto financing options that may be available to you.
Auto Loans from Lending Institutions
You can get a car loan from a bank, credit union, or other lending institutions. The car that you purchase will serve as collateral for the auto loan. This means that the lender can repossess your vehicle if you default on the car loan. Auto loans are a popular car financing option because they generally offer reasonable interest rates and are relatively easy to get.
Two factors are likely to affect the total cost of the car loan. One is the term or duration of the loan. Generally, the longer the term of the loan, the lower your monthly installment will be. But you'll end up paying more towards interest and this will increase the total cost of the auto loan. If you can afford it, get a short-term loan. Your monthly installment will be higher, but you'll be paying less money over all. The second factor that may affect the total cost of your car loan is your credit rating. Creditors with less-than-stellar credit history are usually charged a higher interest rate because of the elevated credit risk.
Dealer Financing
Like traditional auto loans, dealer financing is reasonably easy to get. Most dealerships have relationships with numerous lending institutions, so they can arrange car loans even for car buyers with blemished credit histories. To compete with traditional bank loans, many dealerships offer zero percent or very low interest on dealer loans. However, such loans are available to car buyers with stellar credit ratings. Consumer experts advise car buyers to get pre-approved on an auto loan from a bank or credit union before approaching the dealership for possible financing. By getting loan pre-approval from another lending institution, a car buyer gets the upper hand when bargaining for a lower rate on a dealer loan.
Home Equity Loans and Home Equity Lines of Credit
If you own a home and have accumulated substantial equity on your property, then you may consider getting a home equity loan or a home equity line of credit. Home equity loans are fixed or adjustable rate loans that you repay over a predetermined period. Home equity lines of credit are open-ended, adjustable-rate revolving loans with a maximum credit limit based on the equity of your home. Home equity loans tend to have lower interest rates than credit cards and other types of personal loans. Interest payments on home equity loans may also be tax-deductible up to a certain extent. Home equity loans and home equity lines of credit use your home as collateral, so make sure you are financially capable of paying the monthly installments if you don't want run the risk of losing your home.
Credit Cards
A credit card advance or credit card draft from your credit card company can help you drive your dream car home. Like home equity lines of credit, credit card advances or credit card drafts are revolving lines of credit with variable interest rates. To entice existing customers to avail themselves of credit card drafts, credit card companies waive cash-advance fees, guarantee low rates during the initial period of the loan, or offer high credit limits. However, because credit card drafts are unsecured, they generally have higher interest rates than home equity loans, traditional auto loans or dealer loans. Financing your auto purchase through credit cards could also leave you vulnerable to hefty penalty charges if you make a late payment or exceed your credit limit.
Got a Question? Ask.
Ask the community a question about this article:
Frequently Asked Questions
Mortgage
By: mirindajackson | 04-08-2008
Got a question about personal finance? Type your question here...
I have an upside down mortgage. Is it possible to refinance with my providing up front money?
Only income is S. S. How to minimize reduction of Savings
By: LRB | 04-08-2008
Retired w/only $850.000 Social Security, and living bascis@ $1,200.00 monthly. I am down to $70,000 in the bank, own no home and drive a 13 year old car. How can I stop the fear of outliving my Nest Egg? I cannot live off bank interest..and fear stocks.
Future mortgage after foreclosure and bankruptcy in FL
By: FloridaRELady | 04-08-2008
I am a single professional middle aged lady in Florida in the midst of a bankruptcy due to two properties being foreclosed on. Had great credit and no credit card debt, but having to face facts and get out of a situation that is just getting worse. I can rent cheaper than own, my income (real estate related) has dropped substantially, and now have bad credit.
I already lost the 1st property (TH didn't sell, auctioned) and the $96,000 cash down payment on my primary (2nd property) and equity of last 3 years has just evaporated. I am upside down with the remaining 80% loan balance higher than the current market value. No buyers and difficult lender so couldn't short sale, tired of fighting the war. I am afraid my years of hard work are totally wiped out by what has happened, and unfortunately all my money was tied up in real estate, that was my retirement. I am broke and have to start all over. Will I be able to get a mortgage in the future? What will be my options if my credit is good after the bankruptcy? Any advice?
Yes...if everyone went out and bought two items ...
By: bemarc | 04-08-2008
yes...if everyone went out and bought two items.. not food. a luxury item the entire country everyone.. we are the PEOPLE WHO CAN FIX THE ECONOMY THE MEDIA IS MESSING US AND MESSING WITH OUR HEADS.. WE NEED TO FEEL GOOD ABOUT OUR COUNTRY AND MAKE IT HAPPEN
How risky are Equity Linked CD's?
By: char | 03-08-2008
How risky are Equity Linked CD's?
I won $75,000 from the lottery and think the best ...
By: musseanda | 03-08-2008
I won $75,000 from the lottery and think the best investment is buying property. What do you think?
Q&A Powered by:
Latest Non-Fiction Articles
Book Marketing: the Day That is Different for Your Career Strategy
By: Rosey Dow | 06/10/2008
Make an informed decision about the direction of your writing career--print or online, or both.
In the Lap of the Gods 22
By: Steve Morgan | 05/10/2008
For those who have read the other 21 chapters
A Week in the Life of the Single Working Mother
By: Karen Dosw | 03/10/2008
A humorous article about a week in the life of one South African, single mom with two adult children and two little ones.
Why You Should Write for Free
By: Deborah Owen | 01/10/2008
Write for free? I can hear you saying, “Are you nuts?” Write for free, so you can get paid. Read more inside.
Why You Should Write for Free
By: Deborah Owen | 01/10/2008
You asked if they had a job opening. They said no. They told me “no”, too, but I got the job anyway. Read more inside.
Becoming a Reporter is Easy
By: Deborah Owen | 01/10/2008
Do you want to be a reporter? It’s a great way to break into print, and the jobs aren’t that hard to get. Read this article to learn more.
Writing it Down
By: Galina Nemirovsky | 29/09/2008
Lately I’ve developed a compulsion to write everything down. Stringing words together and composing sentences in the shower, I want to write it all down – remember it – capture it. I stare at people in the subway and craft their character descriptions in my head...
The Modern Lily Tomlin
By: Galina Nemirovsky | 29/09/2008
I’m waiting in a conference room that smells like the corner of career aspiration and stale office carpet. The overly heavy and overly bitter receptionist has a voice that is piercing through the makeshift conference room with walls that only go up about 7 feet. Like an annoying hiccup, she keeps repeating “Good morning, Hudson. Your name? Hold please.” Over and over again. She is an extra large version of what the rest of the world has automated already.
More from William Brooks
Get Your Budget Off The Ground... FAST
By: William Brooks | 16/10/2007 | Finance
There's nothing more we want than to be able to efficiently manage our money. After all, the money that we want to manage is money that is oftentimes, hard earned. This is where that dirty word of budgeting comes in. I have found that only 15 minutes a day makes you a budget master.
Success Is For Those Who Never Stop Learning
By: William Brooks | 16/10/2007 | Advice
Malcolm Knowles (1913-1997), pioneer in adult education, titled one of his books, "The Adult Learner: A Neglected Species." And no wonder. Many people closed their books halfway through life; research on how grown-ups learn was in its early stages; teachers equipped to handle mature students were hard to find.
Payday Loan Interest Rates
By: William Brooks | 13/10/2007 | Non-Fiction
A payday loan is a short term loan made usually until the next payday of the borrower. The loan is non-secured except for the post dated check that is issued by the borrower.
Do Not Go Into Hiding If You Suspect You Are At Risk Of Foreclosure - Call Your Lender
By: William Brooks | 12/10/2007 | Non-Fiction
Too many people that suspect they are at risk of foreclosure just totally freak out and choose to avoid all of the phone calls coming in from their lender and even worse than that, some individuals just decide to run away from it all.
How to Avoid Credit Repair Scams
By: William Brooks | 12/10/2007 | Non-Fiction
Many people find out too late, at the exact moment when they need to rely on their credit, that their score falls short of what a lender would like to see. When you're desperate for a quick fix is when scam artists present you with a credit repair claim that looks too good to be true.
Should Payday Loans Be a Last Resort
By: William Brooks | 12/10/2007 | Non-Fiction
How many times have you been surprised by an unexpected bill? Can a credit card cover this type of emergency? Or do you have to borrow money from friends or relatives? Or maybe you just avoid payments altogether?
Friends Who Owe You Money Can Quickly Become Former Friends
By: William Brooks | 12/10/2007 | Finance
It's pretty much common sense, or at least it's been said a thousand times before, don't lend money to friends and family. What is often missed in that warning is that you should also not sell things to friends and family.
Impulse Spending? The Easy Way To Stop And Save Money To Pay Off Debt
By: William Brooks | 12/10/2007 | Finance
You are guilty of it, in fact we are all guilty of it. There you are standing in line at the grocery store... innocent enough. You happen to look at the magazines and read a headline that gets you attention. You pick up the mag and flip through it... and before you know it, that same magazine is in your bag paid for.
Writing 
