Evaluating the Pros & Cons of 4 Common Car Loan Alternatives

In an ideal world we all want to be debt-free; and borrowing money is something that we all should approach with caution. However, when it comes to living a real life, very few of us will be able to escape borrowing money to finance a larger purchase. A car can be one of those big purchases and, unless you’re happy to ride a bicycle or save up money in your sock, you may need to find an alternative way to finance it.

Getting a car loan can seem a straightforward process but there are a few things you should consider. It’s very easy to fall in a trap and take a larger commitment than you can actually afford.

The majority of car loan calculators found on the web are very optimistic. They will ask you to enter your monthly or yearly income to estimate how much you can afford to borrow. It all seems cut and dried, but there is a catch. For example, let’s assume your yearly income is $40,000 and your spouse’s is $25,000. Depending on the website you use, certain calculators will estimate that you can afford a monthly repayment of $830 (which comes to approximately $10,000 per year). However, many experts recommend that you keep your auto loan spending under 10% of your household income.   So, if your total household income is $65,000 per year, it is more sensible to spend less than $6,500 on finance; that’s $540 in monthly repayments.

By staying under that 10% threshold, you’ll find living more comfortable and less stressful. Once armed with this simple information, you can then proceed with looking for a deal that offers you the best APR and repayment rates.

There are a number of different sources that you can look to in order to finance a car, such as banks, car dealership loans, car finance brokers, and online loan providers. Each of these have their pros and cons, and you should consider which one is the best for you before you ask any questions about getting the loan.

Here is a brief summary of the four most common car loan alternatives:

1. Getting a Car Loan from the Bank

Getting a car loan from your bank is probably one of the most common ways in which car purchases are financed. Banks traditionally offer personal loans so that cars can be purchased, and these have a fairly reasonable APR. The procedure is not very complicated. Bank loans are usually secured, which means you will have to use your home or the car as a security. Recently, banks have become more reluctant to lend to people, and you will need to have a very good credit rating in order to obtain reasonable car loan from this source. In fact, you may find that you struggle to get a loan from the bank under any conditions. This is where other sources of finance should be looked at.

2. Getting a Car Loan from the Car Dealership

Another common source of car loans is through the car dealership itself. Dealers are often associated with a particular loan company, and they can help to negotiate a better rate, although that is not guaranteed as some dealers are quite greedy. This can help you get a car loan which is especially focused upon your car’s needs, including getting cheaper insurance and warranty. However, these types of car loans often have a very high annual percentage rate (APR).

3. Getting a Car Financed through a Broker

You do not actually get your financing from a broker, instead the broker compares offers from different companies and offers a contract with a loan company through the car loan broker. Using a middleman may sound intimidating, however, in many cases a deal like this can be rewarding, as brokers can sometimes help you to get a better deal on your car loan than either banks or dealerships. On the downside, you will have to pay the broker a fee in order to find you a loan, and this can be costly.

4. Getting Car Loans Online

Online lenders can seem like the most attractive offer. They can often supply you with low-cost car loan, which you can then use to purchase the car and obtain the necessary insurance. There are so many of these companies operating through the internet that it is likely you will find some company to take you on, no matter how bad your credit, or how much you need. On the downside, some online lenders are not legal, and they may be trying to con you.   These companies may also go bust, and then your debt will be sold on to collectors. To avoid scams, it is essential that you research the company’s background, check online reviews, and make sure the online lender is registered with a relevant Registry that governs lending companies.

If you commit to a car loan, you’ll need to be prepared to make regular repayments for three to five years. This is not something you’ll want to do on a whim — proper planning and budgeting is essential if you want to ensure you enjoy your car.

Photo Credit: jonrawlinson



Comments

  1. 1

    says

    The last time I financed a car, I got the loan from the dealer to take advantage of the cash back ($1,500 or something like that.) After a few months, I took out a home equity loan and paid off the dealer so I could deduct the interest. If you do this, make sure the loan isn’t going to charge an early pay off fee.

  2. 2

    says

    For years, credit unions have hosted special financing days at dealerships. Members get an invitation to prequalify at the dealership. The credit union promises not to reveal how much of a loan they’re able to give you so you can still negotiate the best price.

    Credit unions often have great rates compared to the banks.

    That said, I’ve only ever financed one car in my life (through my credit union). I can’t see the point of buying a new car when used cars last for years. Now I just save my money and buy a good used car with cash.

    • 3

      Len Penzo says

      I’m with you, Pamela. My next car will be a used car that is only one or two years old. I intend to let the original owner eat the majority of the depreciation all new cars suffer from in their early years. :-)

  3. 4

    nansuelee says

    You forgot Credit Unions. Many credit unions have money to lend and are willing to work with folks even those with less than stellar credit.

    Also, while they do the paperwork, dealerships are not making the loans themselves. They work with area banks and credit unions and sometimes get paid a percentage of the loan rate for their work. ie, if your loan rate is 7%, 1% of the money you repay the loan with maybe going back to the dealer. It depends on the arrangement the dealship has made with the lenders.

  4. 5

    says

    Although I have not had a car loan in over eleven years, I am a big advocate of credit unions. Generally speaking they have very low rates. There are many credit unions that accept members from the public.

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