Car Finance Options

Jul 28 By Emily Harper

When buying a car, be it new or pre-owned, most buyers typically consider financing options vs paying upfront in cash. While a few may opt for cash transactions when purchasing a vehicle, the majority require at least partial credit options to seal the deal. It's crucial to grasp the financing choices available for buying a car, along with their advantages and drawbacks to ensure you're making a wise financial move. This article delves into the different ways to finance a car, like utilizing a bank or other financial institutions well as considering other options, from a car dealer's finance department or even using a credit card, comparing the various features.

Banks

One of the most popular and straightforward options for financing a car is taking out a loan from a bank. Banks generally offer specifically tailored car loans with terms ranging from 36 to 72 months.

Benefits

• Banks typically offer competitive interest rates, especially rewarding good credit scores. Interest rates are usually fixed, with variable rates sometimes offered as options.

• Many banks provide flexible loan terms, allowing you to choose a repayment plan that best fits your budget. These loans typically also allow early or extra repayments without any penalties.

• Banks can often provide pre-approvals before purchase, which allows more purchasing flexibility and negotiation power with dealers to obtain the best price.

Disadvantages

• Banks typically have formal approval criteria, including credit checks and income verification. Having a solid credit score combined with stable income are critical to the success of obtaining loan approvals. While banks may still offer loans with lower credit scores, these loans would possibly come with higher interest rates and/or require some other form of collateral to secure against.

• The application process with banks will usually take longer than options offered at the dealership.

Credit Unions

Credit unions offer car loans much like banks, however, they are known for offering lower rates since they are member-owned and usually operate as not-for-profit institutions.

Benefits

• Credit unions often offer lower interest rates compared to traditional banks.

• Credit unions may have more lenient lending criteria and are often more flexible with their members regarding loan terms and repayment options.

• Being smaller institutions than banks, credit unions may offer quicker approvals, especially if they use modern digital platforms.

Disadvantages

• Many credit unions require you to be a member, which might involve meeting specific criteria like working in a certain industry or living in a particular area.

• Credit unions usually have less branch locations and less robust online presence compared to large banks.

Car Dealer Financing

Many car dealerships offer financing through their own finance departments. The dealers don't actually lend out money, rather they have partnerships with banks or other financial institutions earning a commission on the transaction. Dealer financing can be convenient since the entire process is handled in one place. Additionally, dealerships occasionally offer special promotions such as low-interest loans.

Benefits

• Dealer financing is often the easiest option since you can complete the entire purchase and loan process at the dealership, often on the same day

• Dealers occasionally offer attractive financing deals, for example; low or even zero percent interest for a set period, no down payments, flexible loan terms.

• Manufacturers can sometimes offer rebates or cash-back incentives that are only available through dealer financing.

Disadvantages

• Excluding promotional offers, dealer financing is often set at higher interest rates, to allow dealers to yield additional profit margins from the financing.

• Early payout penalties and other fees may be included in the loan contract, making it more costly to pay off the loan early. These fees are usually higher than equivalent fees from banks and credit unions.

• Car dealers may push for additional add-ons like extended warranties, insurance, or service packages, therefore, increasing your total loan amount.

Credit Cards

When paying a portion of the car purchase with cash (or trade-in), using a credit card to pay the down payment or balance can be an option to secure the purchase. This method is generally only feasible if the dealer accepts credit cards for large payments and if the buyer has a high enough credit limit. The buyer would normally only do this as a short-term loan due to the higher interest rates a credit card normally attracts compared to dedicated car loans.

Benefits

• Using a credit card can provide immediate access to extra funds required to secure the purchase

• If you have a rewards credit card, you could earn points, cash back, or travel rewards on the purchase

• Some credit cards offer a 0% introductory APR for a set period, allowing you to pay off the car without interest for a short time.

Disadvantages

• Excluding any introductory periods, credit cards usually have much higher interest rates than car loans. These rates can range from 15% to 30%, significantly increasing the overall cost of the car if not repaid quickly.

• Using a credit card to purchase a car may not be practical due to credit limit constraints

• Typically used as a short term loan only with no viable long term offering

Example Comparison

The following comparison calculations outlines typical options available

• Loan Amount: $30,000
• Loan Term: 60 months (5 years)
• Interest Rate:
  • Bank Loan: 4.0%
  • Credit Union Loan: 3.0%
  • Dealer Financing: 5.0%
  • Credit Card (after 0% intro): 18%

Financing Option	Monthly Payment	Total Interest Paid	Total Loan Cost
Bank Loan (4.0%)	$552.50	$3,150	$33,150
Credit Union (3.0%)	$539.06	$2,343	$32,343
Dealer Finance (5.0%)	$566.14	$3,968	$33,968
Credit Card (18.0%)	$762.50 (post intro)	$15,750 *	$45,750 *

NB: assumes full balance carried with no payments during intro period

Early Repayment Gotchas

When taking out a car loan, it is important to read the fine print, specifically, how the institution handles extra repayments and early payouts. Some lenders impose fees for early payout, which adds to the overall cost.

• Banks and Credit Unions: These lenders typically have more flexible conditions on their loans, including minimal fees for early payout.

• Dealer Financing: These loans often come with early payout fees as the dealer receives a commission for each approved loan. If you pay the loan off early to save interest, the lender would also have reduced profit, and therefore less commission to the dealer. To avoid this, fees or penalties are often written into the contract to ensure compensation back to the lender to cover the profit expectations.

• Credit Cards: These do not have have any fees for early repayments, and in fact, reward you for early payouts by saving you significant interest. Credit card usage for loans should always be treated as short-term with the view to payout the balance as soon as possible.

Summary

Purchasing a car outright with cash may save you from interest charges and grant ownership, however, for most buyers, financing presents a feasible choice to consider. Taking out a car loan enables you to safeguard your cash savings and manage payments gradually. Nonetheless, it is crucial to compare the expenses of financing. Such as; interest rates, costly fees and potential penalties.

In the end, the most suitable financing choice relies on your circumstances and credit history as well as the available loan terms accessible to you. To make a informed decision and secure the car you desire at a competitive price, it is important to thoroughly compare various car loan options and their associated expenses.