Car Financing Options

Many average consumers aren't wealthy enough to afford to purchase a new car outright. The average new car, depending on the model, will usually exceed $10,000, and even some used cars will come in at this price point or higher. So, if you are on the market for a new car, you may need to explore car financing options.

Loan from Financing Company

The first financing option that many car buyers look into is financing through the car dealership. These departments are linked to banks that are authorized to approve or deny auto financing. The decision is based on your credit rating, past payment history and amount of money you can put down. Some dealerships offer special financing for exceptional credit borrowers, such as zero percent APR, no down payment or cash back arrangements.

Lease

An alternative option for financing a car is leasing. This is similar to, yet not the same as a car loan. You are not paying to own the car; you are paying for the privilege of using it (similar to a long-term car rental.) The payment is based on calculations that involve an interest rate (profit) decided by the financing company, the length of the contract and the residual value of the car (amount the car will be worth when the car is returned).

Personal Loan

You can skip the dealership's financing company and go for your own personal loan at a bank or other financial institution. You must have exceptional credit to get an unsecured loan outside of a dealer to cover an expensive purchase such as a car. In some cases, you may be able to link the loan to the car and put the title down as collateral. Ask the potential lender if this would increase your chances of being approved. This is not always the most economical choice, as unsecured loans can carry interest rates as high as 25 percent.

Credit Card

Some people with high credit card limits will choose to finance a car purchase with a credit card. While not all dealers will take a credit card for payment directly, you can do a balance transfer from the card to get cash. Whether or not this is a good decision is based on the interest rate that the card carries. If the balance transfer rate is 0 percent, and you are confident that you will be able to make payments on time and on full for the entire time you carry the debt, this is a good choice.

Warning

The down side of all car financing options is that unlike houses, cars depreciate in value. You could find yourself in a situation where you have paid thousands in principal and interest only to find that your car is worth much less than the current balance to be paid off (this is called an upside down car loan).