You've found the car that makes your heart beat 120 times per minute. Now, the only thing between you and the car of your dreams is getting the money to pay for it. In a perfect world, you wouldn't think twice about paying the full price in cash. But if you're like seven out of ten people who buy cars and trucks and don't live in a perfect world, you probably wouldn't be paying for your car with cash. Instead, you'd probably use one of several ways to finance it.
Understanding the basics of each car financing option is important if you want to choose the one that works best for you. Here is an overview of the different ways you might be able to pay for a car.
Institutions that give out auto loans
You can get a loan for a car from a bank, a credit union, or another place. The loan for the car will be secured by the car that you buy. This means that if you don't pay back your car loan, the lender can take your car back. Auto loans are a popular way to pay for a car because they are usually easy to get and have reasonable interest rates.
The total cost of the car loan is likely to depend on two things. One is how long the loan will last. Most of the time, the longer the loan term, the lower your monthly payment will be. But you'll end up paying more in interest, which will make the whole car loan cost more. Get a short-term loan if you can pay for it. The amount you pay each month will go up, but you'll pay less money overall. Your credit score is the second thing that could change the total cost of your car loan. Due to the higher credit risk, creditors with less-than-perfect credit histories usually pay a higher interest rate.
Financing for dealers
Dealer financing is pretty easy to get, just like traditional auto loans. Most dealerships have connections with many different lenders, so they can help people with bad credit get car loans. Many dealerships offer loans with zero percent interest or very low interest rates to compete with traditional bank loans. But these loans are available to people who want to buy a car and have good credit. Consumer experts say that people who want to buy a car should go to a bank or credit union to get pre-approved for an auto loan before going to the dealership to ask about financing. By getting pre-approved for a loan from another lender, a car buyer has the upper hand when trying to get a lower rate on a loan from the dealer.
Loans and lines of credit on home equity
If you own your home and have a lot of equity in it, you might want to get a home equity loan or a home equity line of credit. Home equity loans are loans that you pay back over a set amount of time. They can have a fixed or variable interest rate. Home equity lines of credit are revolving loans with a maximum credit limit that is based on how much equity you have in your home. The interest rate on these loans changes over time. Most of the time, the interest rates on home equity loans are lower than those on credit cards and other types of personal loans. Up to a certain point, you may also be able to deduct the interest you pay on a home equity loan. Your home is used as collateral for home equity loans and home equity lines of credit, so make sure you can pay the monthly payments if you don't want to risk losing your home.
Charge cards
Your credit card company can help you buy your dream car by giving you a credit card advance or credit card draught. Credit card advances or draughts are revolving lines of credit with variable interest rates, just like home equity lines of credit. Credit card companies try to get their current customers to use credit card draughts by waiving cash-advance fees, guaranteeing low rates for the first part of the loan, or giving them high credit limits. But because they are not secured, credit card draughts usually have higher interest rates than home equity loans, traditional auto loans, and dealer loans. If you pay for your car with a credit card, you could get hit with big fees if you make a late payment or go over your credit limit.
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