There are a number of ways to finance a car loan, and it’s important to know you are avoiding scams, not paying for things you don’t need, and getting the best deal possible. Paying cash for a new car is beyond the realm of most people, and even if you have cash to draw on, it may still not be the best financial option due to interest and repayment rates. More than likely your new car purchase will be financed by the dealership, a bank, credit union or other financial institution. There are a range of considerations to evaluate before you make your choice.
On the face of it, financing your car purchase through the dealership would seem to make sense. After all, it’s convenient, and you can be behind the wheel of your new car in no time. The downside is that you might be negotiating with a seasoned (or even shady) dealer who is expert at extracting every dollar from their customers. It could turn into a high pressure situation where you are persuaded to accept unnecessary add-ons such as rust-proofing and additional insurance cover. The loan repayments from a dealer are often also front-loaded, meaning interest rates will be exceedingly high at the beginning of the repayment schedule.
Banks and Credit Unions
This is a popular option for a number of reasons. Interest rates are competitive, and there is no additional sales pitch for add-ons. Some banks even entice customers with free insurance. The interest rates are also spread evenly for the duration of the loan. The only real drawback is the time it takes to set up a face-to-face meeting with your bank loan-manager.
Institutions are understandably offering more online services, including car loans. The rates are competitive and loan approvals can be made on the internet, without additional inconvenience. However, not everyone feels comfortable with the impersonal nature of online deals, and there are always scams to beware of.
Using home equity
The rates are competitive, as your bank is in competition with other major financial institutions. If you have already paid off a large amount of your home loan, it could be convenient to extend the loan without eating into your savings. On the other hand, if you use too much equity and then decide to sell your home it could cause financial strain.
One of the biggest influences on your car loan repayments will be your credit rating. Lenders can access information about your credit history (including defaults) that will affect your prospects of getting a loan and the interest you will be asked to repay. If you are in the high-risk category your interest rates will be higher.
You will enjoy driving your new car more if you are not saddled with oppressive monthly repayments. Consider the duration of your loan, as a shorter loan term will incur higher monthly repayments.
Understanding how dealerships work
A car dealership has several income generating departments. Often the finance and insurance department makes as much (if not more) profit than the sales department. A dealer often acts as a middle contact between the buyer and lender. A dealer will try to get the lowest possible interest rate, and then increase it in order to profit. If you are financing through a dealer, take your time and research available rates to make sure the mark-up is not unreasonable.
Your new car dealer will also offer a bunch of incentives such as zero-percent interest or extravagant rebates on your old car. Rebates can actually be a real saving to you and are sometimes offered when dealerships are overstocked with certain makes and models. However, don’t forget that the rebate is money for you and not leverage for the dealer to insist you pay full price for your new car. There is still plenty of room to negotiate.
More ways dealers make people pay extra
Extended warranties are offered on your new car. Actually, all new cars come with a warranty that could be suitable for your needs. There are also other sources of acquiring an extended warranty such as banks and credit unions, often at better rates.
The dealer will probably also offer you rust, fabric or paint protection for additional cost. If you are purchasing a new car, rust protection and undercoating has already been applied in the car manufacturers factory. Fabric protection is the equivalent of that which you can buy in a can from any hardware store, and paint protection is a sealant car wax that you will be applying anyway when your wash your new vehicle.
Window etching and alarm systems are additional items that will safeguard your purchase. They are relatively inexpensive procedures and installations that can be done yourself or by a reputable company at a fraction of the price a car dealer will offer.
Research first – buy later
Not all car dealers are cowboys. After all, it’s in their best interest to satisfy customer requirements, and you can get a very good deal. Prior to purchasing, shop around for a loan by approaching the various lending institutions, as well as talking to your dealer. When you know exactly how much you have to spend you will be in a position to negotiate and take advantage of the best deal on offer. A little research could save you thousands of dollars on your next new vehicle purchase.