Buying a car is one of the biggest purchases most people make. In fact, next to buying a house, purchasing a car is the biggest financial commitment most of us make in our lifetime. So it should come as no surprise that there are numerous ways to finance the purchase of a vehicle, be it a car, truck, minivan or sport utility vehicle. But which financing option is best for you? There are many things to consider. Here is a list of seven financing options available when buying a vehicle, and the pros and cons of each option.
7. Dealer Financing
How it works: Dealer financing involves you paying back the cost of the vehicle to the dealership on a set payment schedule and at a set interest rate. You will usually make monthly payments over an extended period of say 60 months (five years) and for a fixed interest rate of say 5%.
Pros: This is a pretty straightforward means of paying a vehicle off. The upside is that you will own the vehicle outright once it is paid off, and that you will not be limited to driving a set amount of miles per year as with a lease. Essentially with this kind of payment plan, the vehicle is yours do with as you please. If you can afford the monthly payments and the interest is relatively low, this is a good financing option. Note that 0% interest on this financing option would be ideal.
Cons: For this to be an attractive financing option, the interest rate charged needs to be low—3% or lower is recommended. If the interest being charged is 5% or higher, you should look elsewhere for a lower rate. Also, the length of the loan needs to be negotiated and kept low. Many dealerships will stretch out the repayment period to keep the monthly payments lower. But if you have a 66 month repayment time period, or longer, you should calculate how much you’ve actually paid on the vehicle when all is said and done. Try to buy a car that you can pay off in three years or less. Financing of 36 months or lower is what most money experts recommend.