Nowadays, cars and vehicles are transforming from a luxury into a necessity. It is impossible to underestimate how important this means of transportation has become. Its importance leads to many Americans wonder about what is the best way to finance a car.
One of the most popular ways to finance the purchase of a car is by applying for a car loan. Hopefully, now you can easily find a bank near you to apply for a loan. This option is available for those with a credit history. You can apply for a car loan through a dealership or a bank – the difference between those options is that the dealership will do all the necessary paper and administrative work on your behalf, which will lead to a higher cost of service.
There are three ways to repay a car loan:
- Installment-sale agreement means that once you have chosen the car, you should pay for it in equal installments every month. Usually, the term is set to be between one and three years (12 to 72 months). During that term, the car is owned by the bank or credit provider. You will become an owner of the car once you pay your car loan in full.
- Installment sale with a balloon payment is a similar installment sale agreement option. The only difference lies in installments distributions. Typically, during the installment sale with a balloon payment your last installment is higher than other installments (usually around 25-30% of the price). You should bear in mind that while balloon payment reduces your monthly payments, it may become a significant burden on your finances once you reach the final installment.
- Lease agreement provides you an opportunity to use the car with minor restrictions while you pay monthly installments for the auto. Once you repay a car loan, you can either return the car, buy it, or renew the lease agreement.
Finally, you can use finance your car using other types of loans, including mortgage or home loan, or personal loan. Generally, home loans have lower interest rates than possible car loans, so taking money from them may be less expensive than applying for a separate car loan. Using your home loan to finance is also beneficial as it will provide less administrative work bearing in mind that you already have a home loan and you do not need to document it once again. Nevertheless, the major drawback is that you can only withdraw the amount of money out of your bond that you have paid over and above your monthly home loan repayments.
In case you can’t get the bank’s approval to finance a specific vehicle, you can try to get a personal loan instead of a car loan. With your personal loan, you will not be limited by bank or dealership with your preference of the car, as they may not agree to finance older models. By using a personal loan, you can also negotiate a reduction in price for the car, as you will most likely pay the full price at one installment and transfer the cash in one take. You will also obtain possession of the car immediately once you pay for it without a need to wait for additional approvals from the banks or other organizations. Nevertheless, you need to take into account that personal loans are generally unsecured, which means that the interest rates are higher. You will not need to repay more for the car, but in comparison to a home loan or car loan, you’ll pay more in interest. Another consequence of personal loans being unsecured is that you’ll need a relatively high credit score to obtain them in the first place.
The easiest way is to finance your future car is obviously by using personal funds. Of all the methods described in this article or elsewhere, it will always be the cheapest way for a simple reason – all of them include at least some form of participation of intermediaries like banks or credit providers. All of those intermediaries require interest on any loan or finance agreement apart from the car itself. The absence of those additional payments will significantly save you money. Apart from that, there is no real advantage or disadvantage in using cash for the purchase of a motor vehicle.
While using your funds, there are some aspects important to remember. Personal funds do not only mean savings. You may receive some of the types of payout or borrow cash from your nearest. You should also always plan and be ready for emergencies. With that in mind, you’d better plan to have enough personal savings left in case of an emergency after you spend a sum of money on a car.
In conclusion, we want to point out that there are several ways to finance your car. Finding a way to receive a higher profit from purchasing a vehicle is a necessary measure to ensure that the car will not become a financial burden on your budget.