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Automobile Financing - Know Your Options
You’ve found the car that makes
your heart race by 120 beats per minute. Now only one
thing stands between you and the car of your dreams:
financing the purchase. In a perfect world, you’d
pay the full price in cash without blinking. But if
you’re like the seven out of ten car and truck
buyers who don’t live in a perfect world, chances
are you’d be paying for your car through one of
several financing schemes.
Understanding the basics of each car
financing option is key to choosing the automobile financing
strategy that best suits your situation. Here is an
overview of auto financing options that may be available
to you.
Auto Loans from Lending Institutions
You can get a car loan from a bank,
credit union, or other lending institutions. The car
that you purchase will serve as collateral for the auto
loan. This means that the lender can repossess your
vehicle if you default on the car loan. Auto loans are
a popular car financing option because they generally
offer reasonable interest rates and are relatively easy
to get.
Two factors are likely to affect the
total cost of the car loan. One is the term or duration
of the loan. Generally, the longer the term of the loan,
the lower your monthly installment will be. But you’ll
end up paying more towards interest and this will increase
the total cost of the auto loan. If you can afford it,
get a short-term loan. Your monthly installment will
be higher, but you’ll be paying less money over
all. The second factor that may affect the total cost
of your car loan is your credit rating. Creditors with
less-than-stellar credit history are usually charged
a higher interest rate because of the elevated credit
risk.
Dealer Financing
Like traditional auto loans, dealer
financing is reasonably easy to get. Most dealerships
have relationships with numerous lending institutions,
so they can arrange car loans even for car buyers with
blemished credit histories. To compete with traditional
bank loans, many dealerships offer zero percent or very
low interest on dealer loans. However, such loans are
available to car buyers with stellar credit ratings.
Consumer experts advise car buyers to get pre-approved
on an auto loan from a bank or credit union before approaching
the dealership for possible financing. By getting loan
pre-approval from another lending institution, a car
buyer gets the upper hand when bargaining for a lower
rate on a dealer loan.
Home Equity Loans and Home Equity
Lines of Credit
If you own a home and have accumulated
substantial equity on your property, then you may consider
getting a home equity loan or a home equity line of
credit. Home equity loans are fixed or adjustable rate
loans that you repay over a predetermined period. Home
equity lines of credit are open-ended, adjustable-rate
revolving loans with a maximum credit limit based on
the equity of your home. Home equity loans tend to have
lower interest rates than credit cards and other types
of personal loans. Interest payments on home equity
loans may also be tax-deductible up to a certain extent.
Home equity loans and home equity lines of credit use
your home as collateral, so make sure you are financially
capable of paying the monthly installments if you don’t
want run the risk of losing your home.
Credit Cards
A credit card advance or credit card
draft from your credit card company can help you drive
your dream car home. Like home equity lines of credit,
credit card advances or credit card drafts are revolving
lines of credit with variable interest rates. To entice
existing customers to avail themselves of credit card
drafts, credit card companies waive cash-advance fees,
guarantee low rates during the initial period of the
loan, or offer high credit limits. However, because
credit card drafts are unsecured, they generally have
higher interest rates than home equity loans, traditional
auto loans or dealer loans. Financing your auto purchase
through credit cards could also leave you vulnerable
to hefty penalty charges if you make a late payment
or exceed your credit limit.
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