Auto Financing Options – Pros & Cons of Each

Buyer getting car keys after successfully getting financed for an auto loan.With the dream car, truck, or SUV in mind, it’s time to figure out how to pay for it. Since most buyers will need financing to secure their new or used vehicle, considerable time should be invested to make sure that the financing is appropriate for the individual borrower.

There are many options when pursuing automobile financing, and each can offer unique benefits, as well as specific drawbacks.

Sources of Vehicle Financing

The Auto Dealership

  • Pros: Convenient, fast, can accept a wide range of credit profiles
  • Cons: High pressure, usually not the best rate

Bank or Credit Union

  • Pros: Competitive rates, personal service, more repayment terms available
  • Cons: Not as convenient as a dealership, potentially need strong credit to qualify

Online Lender

  • Pros: Competitive rates, quick funding, easy application
  • Cons: Minimal personal service, could be delays in getting funds to dealership

Home Equity Loan

  • Pros: Competitive rates, longer repayment term, potentially higher loan amount for more expensive vehicles
  • Cons: Tying your car to your home as collateral is risky, requires a much longer application and approval process, may require higher credit

How Your Interest Rate is Determined

Wherever you choose to secure financing, an interest rate will be offered based on several factors. Knowing what factors influence this rate can help you lock in the best rate for your situation.

The first and most important factor is your credit score. As with all loans, the lender is going to want to know what type of risk you present as a borrower. This is most quickly identified by your previous money management and spending habits with other credit accounts. The lower your credit score, the higher the interest rate.

Second, the term of the loan influences the rate. Normally, the shorter the term of the loan, the better the rate offered by the lender. The risk is lower with a shorter-term loan because the lender can assume to be paid back faster.

While these factors are typically used in most lending scenarios, often the dealership will play by a different set of rules. Lending may also be influenced by various incentives that may be offered by the manufacturer. Financing at a dealership is a large profit generator, and you must be prepared to negotiate proposed terms. This includes the interest rate, down payment, rebates, terms of the loan, and monthly payments.

Questions to Ask the Lender

  • What is the percentage rate I’m paying?
  • Are there penalties in the loan agreement for late payments, early pay-off, or other scenarios?
  • What is the full price I am paying for the vehicle, including upfront charges?
  • What is the total amount being financed?
  • What is the breakdown of total finance charges?
  • What is the total number of payments?
  • Is the finance deal contingent on financing from a third party?
  • Is credit insurance or other stipulations required?

Exploring all options and weighing the benefits and drawbacks of each is an important step to securing your new car. The right financing can not only save you money, but a headache in the long run.

Also, understanding your auto insurance options is helpful in budgeting for a new car. Next, we cover the different types of auto insurance coverage.

Borrow up to $50,000 with low fixed rates!

Posted on August 9, 2021 by in Auto Lending

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