Loan options for cars
Hire purchase agreements are usually arranged by the car dealer, so are convenient to arrange and can be very competitive for new cars, but less so for used ones. This type of car finance deal is similar to a hire purchase agreement but you usually make lower monthly payments. Instead of getting a loan for the full cost of the car, you get a loan for the difference between its price brand new and the predicted value of the car at the end of the hire agreement.
This is based on a forecast of annual mileage over the term of the agreement. Remember the balloon payment will normally range from a few thousand pounds to many thousands of pounds and will be larger than your monthly payment.
Peer-to-peer loans, or social lending, allow people to borrow or lend from each other without banks or building societies being involved. You can find peer-to-peer loans on websites like Zopa. When you compare car finance deals, there are a few key things to do before making a final choice. Using your savings is the cheapest option for buying a car, while personal loans are usually the cheapest way to borrow to buy a car, but only if you have a good credit history.
Best way to finance buying a car Buying a car is no simple decision. Why should I use cash or savings when buying a car? The cheapest way to buy a car is to fund all or part of it in cash. If you decide to use cash, remember: Make sure you have enough savings left over for an emergency after you have paid for your car.
You should pay the bill off in full the next month. Read our guide on How to set a savings goal. Take a look at our guide on Buying a car through a personal loan for all the information you need. Read our guide to Buying a car through hire purchase.
You can find out everything you need to know about leasing a car here. Find out more about using credit cards. Find out more about peer-to-peer loans. A guide to financing your new car from the Finance and Leasing Association opens in new window.
The following table can help you determine which is better — buying or leasing? Some dealerships offer in-house financing to people with poor or no credit. While these dealerships may be a suitable option if you need transportation in an emergency, they offer higher interest rates than you could get with a bank or online lender.
You can get a free copy of your credit reports annually from AnnualCreditReport. Several websites such as LendingTree also make it possible to get a free estimate of your credit score. If you have poor credit, you may be asked to get a cosigner for your car loan. This person will take out a car loan with you, making themselves mutually and individually responsible for the repayment of your loan.
The best ways to reduce the amount of your car loan and monthly payment are saving up a large down payment, buying a less expensive car and choosing a vehicle with fewer features. Getting preapproved by a lender for an auto loan up to a certain amount is a good way to start your search for a new or used car. Having a preapproval letter in hand may even put you in a better bargaining position with a dealership.
Shopping around for the best loan will have minimal impact on your credit report, if any. The benefit of shopping around and getting a lower rate will far outweigh any downsides. To minimize the impact of hard inquiries on your credit report, try to do all of your loan shopping within a period of days. Down Payment on a Used Car: How Much To Put Down. How to Avoid Car Leasing Charges. Learn How to Determine a Cars Value. Johnson November 30th, How to finance a car But how do you take out a car loan?
How much car can I really afford to finance? Determine how much car you can afford. Factor in all the costs of ownership. How my credit score impacts my auto loan APR Individuals with a lower credit score considered deep subprime credit scores below , subprime scores from , or nonprime scores typically pay higher interest rates to borrow money for an automobile.
To provide more depth on the subject, the following table illustrates how your credit score can impact the APR on your car loan: Before you buy a car or apply for an auto loan, try to avoid these mistakes at all costs: Forgetting to factor in additional expenses In addition to the costs of borrowing and financing a car, there are additional expenses involved in owning and maintaining a vehicle.
Rolling lots of add-ons into your auto loan Auto dealerships are notorious for offering lots of add-ons you can roll into your auto loan. Not reading the fine print Before you sign on the dotted line, make sure you read your auto loan document in its entirety. Bank or credit union According to Jonathan Olsen of auto financing website rateGenius. Pros of getting an auto loan from a bank or credit union include: And you may not be penalized as much for having a low credit score if you have a long relationship with the bank already.
Personal touch — Olsen notes that many people turn to banks and credit unions when getting an auto loan because they prefer to interact with a lender in person. Cons of getting an auto loan from a bank or credit union can include: Lack of technology — Small credit unions and banks often lack some of the technology that consumers like — perks like online bill-pay, automatic payments or online account management. Higher interest rates at banks — Olsen says credit unions tend to offer lower APRs than banks.
Online auto lenders Online institutions may offer less of a personal touch, but their loan offerings are similar to those from brick-and-mortar institutions. Some of the pros of getting an auto loan online include: Further, shopping around online is a good deal whether you decide to go with a bank or not. Price — Depending on your credit score and loan offers available, you may qualify for a lower APR and better loan terms with an online lender.
Cons of getting an auto loan online include: Keep in mind, however, that you can often get a preliminary auto loan offer without giving your Social Security number or other personal data. No personal touch — Getting a loan online is impersonal and some people crave the personal connection you get with a brick-and-mortar institution.
Dealership financing Applying for financing from a car dealership is popular among auto buyers who purchase both new and used cars. Pros of dealer financing include: Special promotions — Olsen says dealerships often have special promotions to get you to use their financing. On new cars especially, you may qualify for 0 percent intro APR or low interest financing, along with special rebates or discounts.
Cons of dealership financing include: As a result, their loans may come with higher APRs and more added costs, specifically on used cars. Home equity loans Home equity loans let you borrow a fixed amount of money against the equity you have in your home. Pros of using a home equity loan to buy a car include: Negotiation power — With a home equity loan, you would get access to cash you can use to buy a car. Tax incentives — You may be able to write off the interest on your home equity loan if you itemize your taxes, and you cannot write off the interest on an auto loan.
Cons of using a home equity loan: Buyers should try to take advantage and keep their home and auto purchases separate, he says. Pros of getting a loan from family or friends include: Potentially better rates — Your family might loan you money for lower rates than you could qualify for elsewhere, particularly if you have bad credit. Cons of borrowing from family and friends: Experian, Equifax, and TransUnion. Financing a new car versus a used one Financing a new car works similarly to financing a used car, says Olsen.
Those differences can include: The following table shows how buying and financing a new or used car might look in terms of price, long-term costs and depreciation: Financing a New vs. Financing Leasing a car Financing a car How does it work? With a lease, you pay a set monthly payment until your lease is over. However, you never own the car. When you finance a car, you agree to the terms of a loan then make set monthly payments until your car is paid off.
Who owns the car? With a lease, the dealership owns the car the entire time. Once your car is paid off, you will receive the title and own your vehicle. If you go over your mileage limit, however, it can become very costly. Buying a car may be costlier in the long run. However, you can potentially own the car yourself. Can I get out of this agreement? When you lease a car, you may be subject to early-termination fees if you end the lease early.