Car Loans Options Explained

By: Robert Rogers

There are basically three components to a loan. TRUTH IN LENDING requires creditors to give you certain basic information about the cost of buying on credit or taking out a loan. These "disclosures" can help you shop around for the best deal. The amount you will finance (principle), the interest rate you will pay (APR - annual percentage rate), and the duration of the loan (term). Payments are usually made in monthly installments over a set period of time.

Even when you understand the terms a lender is offering, it's easy to underestimate the difference in dollars that different terms can make. Suppose you're buying a $7,500 car. You put $1,500 down, and need to borrow $6,000. A difference of one year shorter in the term of the loan can mean almost a $500 savings. A mere difference of 1% APR of a loan can save over $100.

Lenders must tell you the total finance charges, when the finance charges begin, and the method they use to figure the balance on which you pay a finance charge. The most common method is the average daily balance method. Be aware that the amount of the finance charge will vary considerably depending on the method used, even for the same pattern of purchases and payments. Study them carefully; they can significantly affect your finance charge.

Dealer Financing

Getting a loan from the dealer directly is probably the easiest to get. Many dealerships have several relationships with banks and other lending institutions, which specialize in a wide range of lending products. Car buyers with excellent credit, buyers with bad credit, buyers with no credit, zero down, zero percent, and so on. This is very attractive to many buyers, but can also be confusing. The best strategy for a car buyer is to get a pre-approval loan from their local bank or lending institution outside of the car dealership. This will give you the upper hand when bargaining for a lower rate with the dealer.

Home Equity Loans

With interest rates being at record lows and the recent huge appreciation in home values, many homeowners should consider a home equity loan or an equity line of credit when buying a car. 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

Many credit card companies are offering low interest rate loans, no fee cash advances, and even 0% interest rate loans. These are usually introductory offers for first time customers in an effort to entice you to do business with them. Read the offer carefully. In particular, look out for fees, interest rate and how long the offer is good for. Some offers are good for the length of the entire initial advance, while others are guaranteed for a shorter initial period of time.

Credit card advances are unsecured and 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. Don't hesitate to call the credit card company with questions about their offer. Be up front and honest about your credit situation and what you are planning to do with the money. With careful planning and the right offer, you can secure excellent terms and save thousands.

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