7 Options For Financing Your Next Car Purchase Source:

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. Source:–lease.htm Source:

6. Bank or Financial Institution

How it works: Many banks or financial institutions offer specific loans to their customers for the purchase of a car or other vehicle. Similar to dealer financing, these loans are usually for a set period of time and at a set interest rate. People will make monthly or bi-weekly payments on the loan over a few years to pay it off.

Pros: Many banks offer interest rates that are lower and more attractive than what you can get from a car dealership. And, taking out a loan from a bank and paying it off on time can help boost your credit score. Plus, banks are often more flexible with their repayment periods than car dealerships. And, if you take out a loan from a bank and use the money to buy the car outright from the dealer, than you no longer have to be bothered with the car dealership once you drive the vehicle you purchased off their lot.

Cons: Depending on your credit history, a bank or other financial institution may require you to put up some collateral to secure the car loan, such as your house. And, should you have any problems repaying the loan, the bank could increase the interest rate on the loan at its discretion or seize the car from you. Also, not all banks offer low interest rates on these type of loans. Always be sure to compare the interest rates available to you. Source: Source:

5. Leasing a Car

How It Works: Leases are almost always done through a car dealership. Essentially, you rent the car from the dealership for a set period of time. You make monthly payments to lease the car for 36 or 48 months, for example, but these payments are typically lower than if you were to buy a car outright. When the lease period ends, you return the car to the dealership and get another car or simply walk away.

Pros: Leases are great for people who want low monthly payments, and who like to drive new cars all the time. People can return the car they have when the lease period ends and quickly get themselves into another car that is brand new and has all the latest bells and whistles. And lower monthly car payments enable people to spend money on other priorities.

Cons: Leases come with a lot of restrictions and penalties if people break the terms of the lease. For example, most leases prevent people from driving more than 12,500 miles a year. Put more miles on the vehicle than this and you end up paying more money in penalties. You also can’t modify a vehicle you lease or damage it in any way. You will be charged for every nick and scratch. But the big downside to leasing a car is that you have nothing of value when the lease ends. You are not left with a car that you could sell for a profit. And, with a lease, the payments never end. It’s not like financing a car purchase where the monthly payments eventually stop. Source: Source:

4. Line of Credit

How it works: A line of credit is like a credit card in that you have an available sum of money that you can draw on to buy things. Lines of credit have interest rates attached to them, but those rates are usually much lower than on a credit card. There are no requirements to pay off a line of credit in a set period. However, you have to make a minimum monthly payment, usually to cover the interest charged. Home Equity Lines of Credit (HELOCs) are secured against the house you own, and usually offer larger amounts of money and at lower interest rates.

Pros: As mentioned, there is no requirement to pay off a line of credit in a set time frame, and the minimum monthly payments are usually lower than the payments required when financing through a car dealership or a traditional bank loan. Also, lines of credit tend to offer the lowest interest rates. And, people have the satisfaction of paying off the loan in their own time as they see fit.

Cons: The downside of lines of credit is that because there is no timetable for paying them off, the debt on them tends to sit for long periods of time, raking up significant interest in the process. Also, lines of credit are not ideal for big purchases such as cars. Amounts over $10,000 or $15,000 are not great on lines of credit. Plus, if you have a Home Equity Line of Credit, it means the car purchase is secured against your house and the bank could seize your home and sell it to pay off the line of credit in an extreme situation. Source: Source:

3. Credit Cards

How it works: A credit card is a plastic card that you can use to purchase things when you don’t have cash to buy them. There is a set limit on most credit cards—say $10,000—and an interest rate charged for their use. There is typically a monthly minimum payment for credit cards to cover the interest charged.

Pros: As with a line of credit, there is no set time frame for repaying a credit card. And using a credit card to buy a car can be convenient and easy. It allows you to pay off the car purchase on your own schedule.

Cons: Credit cards typically charge the highest interest rates—as high as 30% in some instances. Also, with no set repayment schedule, credit card debt can languish and sit there for long periods accruing interest. This kind of debt can hurt your overall credit score. And with high interest rates, the amount of the debt on a credit card can quickly become compounded and add up. You could end up paying a lot more than the purchase price of the car you bought in the long run. Source: Source:

2. Private Lenders

How it works: Individuals will personally lend you money to buy a vehicle. This usually requires that you sign a contract with them agreeing to repay the loan by a certain date and with a specific interest rate charged on the loan.

Pros: This can be a reasonable option for people who have bad credit and do not qualify for more traditional financing options through a car dealership or bank. Also, the terms of a loan offered through a private lender are often decent with low interest rates and a flexible repayment schedule. Of course, it will help if you know and trust the person you’re borrowing money from.

Cons: Have you heard the term “loan shark”? When you take out a loan from a private citizen you have none of the protections and guarantees you get from a bank or credit card company. If you don’t make the payments, or if the relationship sours between you and the lender, things could get ugly. Buyer beware! Source: Source:

1. Personal Savings

How it works: If you have money saved in a bank account or retirement plan, such as a 401K or RRSP, then you could always draw on this money to pay for your next car purchase outright.

Pros: The pros of this are that you will not have to take out a loan, your debt load will not increase, you will not be charged any interest, and will not have any monthly car payments. In the long run, you will save a lot of money in interest payments. And, for a rapidly depreciating asset such as a vehicle, many money experts say it is good to pay for a car in cash rather than by taking on debt to cover the cost.

Cons: If you have cash on hand, that’s one thing. But if you have to withdraw money from your retirement plan to buy the car, the amount you withdraw will be added to your income for the year and you will be taxed on it. Also, you will lose the compound interest you were earning on this investment and your retirement fund will be depleted. It would be advisable to compare the interest you are earning on your retirement investments to the interest you would pay on a car loan before making this decision. Also, if you draw down your retirement fund, you should have a plan to repay it within a certain time period. Source: Source: