Exploring the Different Options to Financing a Car

Ever since Henry Ford introduced his Model T at the beginning of the twentieth century, Americans have had a love affair with the automobile. And for many of us, borrowing money to buy a car is a financial fact of life much like getting a mortgage to buy a house.

While you may love your shiny ride, it’s important to realize it’s not an investment. According to personal finance consultant, Dave Ramsey, new cars lose 60 percent of their value within the first 5 years! This means it’s always best to buy used — whether you’re paying cash or getting financing.

As most experts will tell you, paying cash for a new auto will save you money in the long run. But not everyone has the funds to do that.

If you plan to finance your purchase, it’s key to understand your financial position and research the various loan options available. To get you closer to owning the car of your dreams, we’ve outlined the pros and cons of the different loan options.

Banks

Pros

• Pre-approval, which can help you calculate the loan amount, rate, and terms
• Competitive loan rates if you qualify
• Your local branch knows you, so it’s a good place to start the loan process
• No pressure to buy a certain car (like at the dealership)

Cons

• Can be conservative unless you have good credit
• Often have high loan fees

Online Lenders

Pros

• Easy to shop around from the comfort of home
• Comparison sites show you offers from multiple lenders side by side
• Willing to work with those with less-than-perfect credit
• More competitive interest rates than traditional banks

Cons

• Some charge high fees and carry penalties for early pay-off
• Customer service can be spotty. Look at customer comments or check out the BBB for any complaints

Credit Unions

Pros

• Credit Unions can offer lower rates than banks because they’re non-profit organizations
• Owned by their members, so typically have lower operating costs than banks
• Higher savings rates and lower fees
• Easy loan applications
• More personalized service

Cons

• Can have limited membership as they’re linked to an employer or group
• Still have fees, although lower than banks
• Can be less digital so you’re dealing with brick-and-mortar and offline applications

Dealer Financing

Pros

• Convenient as you’re already there car shopping
• Often have relationships with lenders and banks so they act as an intermediary
• Often subsidized, so good credit can get you much lower rates
• Dealer loans through banks are good for those with lower credit scores

Cons

• Interest rates can be marked up for dealer profit
• Buyers with low scores will pay a high APR
• No chance to comparison shop for better terms
• Could end up with a different lender if the loan is sold to a third-party lender

Captive Financing

If you buy from one of the large automakers like Toyota, General Motors, or Ford, you may be able to get a loan from their in-house finance department.

Pros

• Finance new and certified pre-owned vehicles
• Great deals are available as the automaker subsidizes the loan
• Attractive terms such as 0% APR for those with strong credit
• Easier to finance for those with damaged credit

Cons

• Willing to give you a high-risk loan you may not be able to afford
• Fees may be inflated to give higher profits to the parent company
• Higher monthly payments as loan periods are shorter

In the end, your financial situation, your credit score, and the type of car you plan to buy will all influence the type of loan and lender that will garner you the best deal. But no matter which method you choose, it’s important to get pre-approved. That way you’ll have peace of mind of knowing you have enough money to cover the purchase, and the loan terms won’t come as a surprise.