Now that you understand the basic differences between new and used car financing, it's time to dive into the specific financing options you may come across. Knowing the specific car loan options you will have, along with their pros and cons, should help you narrow down the financing options to the ones right for you.
Options for Financing a New Car
When you go to buy a new car, there are two types of financing that are most common. You can either get financing from a car manufacturer's financing company or you can get financing from a bank, credit union or online lender.
Manufacturer financing is normally offered at new car dealerships. When you are in the process of buying your car, you'll submit an application for financing through the car manufacturer's financing company. Manufacturers want you to buy a car to increase their sales, so they may offer special low interest rate financing to encourage the purchase of certain vehicles. In order to get the best rates, you'll need to make sure you have a high credit score.
The main benefit of manufacturer financing is usually obtaining a low interest rate that is either better or similar to the interest rate you could obtain through a traditional bank or credit union. However, sometimes dealerships don't offer you the lowest interest rate you qualify for in order to make more money on a transaction. Make sure you know what credit score you need for the best interest rates and get the dealership to show you your credit score before you sign any dealer financing arrangement.
Bank, credit union or online financing is the other main option for financing a new car. In order to complete your new car purchase in a smooth manner, you should apply for a new vehicle loan at your bank or credit union before you head to the car dealership. Tell the bank or credit union which car you plan to purchase and find out how much money you can borrow with your new car loan. Once you have been approved for a loan, go to the car dealership and negotiate your new car price. Don't mention how you'll be paying to make sure you get the best deal possible on the car.
Banks and credit unions generally offer low interest rates on new car loans, but they aren't always as low as special manufacturer financing offers. Your financing transaction will be completely separate from your car buying transaction, so you may end up with a better deal overall. Credit unions may offer slightly lower interest rates than banks, but you should always make sure to check all of your options before deciding which financing to use.
Options for Financing a Used Car
Dealership financing is completely different when buying a used car. Manufacturers don't offer financing for used cars, so any financing you may obtain through a dealership probably won't come with an amazing interest rate. Dealers will work with financing companies to offer used car loans. Depending on where you shop, some used car dealerships will try to make money on your auto loan by offering higher interest rates than you qualify for. Other dealerships may require you to make payments at the car lot in person every month. When obtaining used car financing at a car dealership, make sure you completely understand all the terms and make sure you can't get a better used vehicle loan deal elsewhere before you sign the loan agreement.
Bank or credit union financing for used cars is very similar to the process of financing with new cars. You'll need to let the bank or credit union know what vehicle you'll be purchasing when you apply for a used car loan. The interest rates will likely be higher than financing rates for a new car loan, but bank and credit union interest rates are often much more competitive with, if not better than, dealership financing for used cars.
Unconventional Financing Options for New or Used Cars
There are other financing options if you don't want to go through a dealership or obtain a new or used auto loan from a bank or credit union. Home equity line of credit or home equity loan financing may be an option for you if you have significant equity in your home. The interest rates on these loans are usually competitive, but there are downsides to using these types of loans to buy a car. You may end up paying for your car for many years longer than a traditional car loan depending on the type of home equity loan you take out. Another downside is paying expensive up front fees to set up a home equity loan or line of credit if you don't already have access to your home equity. For instance, you may have to pay an appraisal fee or other closing costs to obtain your initial loan which can add significant costs to paying for your car.
Borrowing money from friends or family is another unconventional way to pay for your new or used car. Sometimes you can get these loans with no interest, which is great for your finances. Unfortunately, mixing money and friends or family is generally not a good idea. Money can easily complicate relationships. Tough financial times or a missed payment can easily cause a huge fight and ruin your relationships. Make sure you fully consider all other options before turning to friends and family to finance your next new or used car.
There are many options to obtain a car loan for your new or used vehicle. Now that you understand the pros and cons of each type of financing, find out how to get the best possible loan in Part Three of the series.