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Finance Options When Buying a New Car

February 24th, 2014

save-moneyIt’s pretty rare that someone has the ability to pay cash when they’re buying a new car. Luckily, there are several different financing options that you will encounter along your car-shopping journey. Some of these options are inherently a better deal, while others will make more sense within the context of particular budgets and financial situations. Here’s a basic breakdown of the options you have when financing a new car. Remember that this is just an overview and that you should thoroughly research each option and consider how it would work in your particular situation before moving forward.

Banks
Research shows that about forty percent of new car buyers make their purchase with the help of a loan from a bank, making this the most popular lending option. The rates you are offered will vary depending on your own personal credit history and financial profile, as well as from bank to bank. It’s wise to spec several different banks and compare the best rates. Make sure to be on the lookout for special lending deals, too, which banks will often promote to attract new accounts.

Credit Unions
Credit unions are similar to banks in that they are both finance institutions, however banks are privately owned and credit unions are owned and controlled by its customers, which usually makes them more beneficial to customers. In fact, the main function of a credit union is to help members by providing credit and loans at reasonable rates. They’re a great resource for auto financing and a great banking alternative, but oddly enough only account for fifteen percent of auto loans.

Car Dealerships
Although your car dealership may offer you a loan, dealerships are not actually financial institutions and don’t actually provide direct loans. Instead, dealerships maintain relationships with dozens of lenders who they will connect car buyers with for financing. Even though car dealers can sometimes get you the best rates on a loan, keep in mind that there is always a fee associated with dealers making this connection for you, and it can easily be avoided by seeking funding yourself.

“Buy Here, Pay Here” Lots
A “Buy Here, Pay Here” lot is an independent auto dealership that does have the ability to provide direct loans to customers. These dealerships have a bad reputation for praying on car shoppers with poor credit and exploiting people in weak financial situations. We recommend staying away from places like this. If it sounds too good to be true, it probably is.

Captive Finance Companies
Most major car dealerships will have a financial department that offers services to customers in order to increase their sales. These divisions are called “captive finance companies” and are deeply integrated with the marketing department, often offering extremely low APR rates to promote products and attract new customers. Captive finance companies are different than loans arranged through car dealerships and “Buy Here, Pay Here” lots.

Title Loans
This is the only option worse than “Buy Here, Pay Here” lots. If this is your only choice, opt for a bus pass and stay far, far away.

Family and Friends
In this economic climate, getting a car loan is difficult for a lot of people. You may have no credit or bad credit, and even if you do get approved for a loan the rates might be so high that you won’t be able to afford it anyway. Borrowing money from family and friends is always a great, affordable, forgivable option.

Home Equity
If you happen to be one of the few people who are thriving or unaffected by our current economic situation and you have built up a substantial amount of equity in your home, you have the option to finance a car purchase by taking out a home equity loan. Home equity can be a good, low-cost option for those who have it.

Are we missing a car financing option? Share your resources in the comments section!