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Car Loans - What Are Your Financing Options?

Updated on January 7, 2011

Getting car loans can be both confusing and intimidating. If you don’t know what's available and you're not familiar with the different types of loans, how can you get the best deal and the lowest possible payments? The answer is, you can't. Learn about the three major types of car loans, the good and bad points of each and what to consider when shopping for the best car loans.

Car Loans - Best the Best Possible Interest Rate


Conventional Car Loans

Regular or conventional car loans are a lot like mortgage loans. You have to qualify for the loan. The better your credit score and the higher your income, the better car loan you can get.

If you have excellent credit, you can get the lowest interest rates on the market. If your credit is "good", the loan company will most likely offer you loans at 2% to 3% more than the lowest rate. If you fall into the "fair" or "bad" credit category, you may be turned down. It all depends on the state of the economy. Even if you have bad credit, most car dealers and banks have loans available.

When it comes to getting a conventional car loan, there are several options:

Option #1 - Banks

Banks finance about 40% of  most car loans making them the most common way to get a loan for a new car. If you're looking for the lowest interest rate possible on a new car loan - and who isn't - you'll get the best deal if you go to your own bank.

If you’ve had a checking or savings account at one particular bank for a long period of time, they'll work with you and give you a better interest rate than you'll find anywhere else. But, you don’t have to have a checking or savings account with a bank to get a car loan from a bank. Any bank is happy to talk to you about lending money for a car loan.

Option #2 - Credit Unions

Credit Unions are the second most popular choice for car loans. They account for about 25% of all car loans and usually offer the best rates - usually 1/2 to 1% lower than bank rates. Credit Unions also usually only charge "simple interest" which saves you money in the long run. The catch? You must be a member. Check around. Most credit unions have a long list of ways and groups you can join to become a member - they want your business, so check.

Option #3 - Finance Companies

These companies are often called "captive finance companies" because they're owned by the car manufacturer. General Motors Acceptance Corporation and Ford Motor Credit are two examples. About 20% of all car loans are made by finance companies. If your credit rating isn't what it should be, finance companies are your best bet at getting a car loan. You'll pay a higher interest rate, but you'll get the loan.

Option #4 - Car Dealers

You'll get the worst car loan interest rates at car dealers. No surprise. The higher interest rate they give you, the higher commission the dealership makes. Some loan companies set a limit as to how high an interest rate a car dealership can charge you - but some don’t.

Be on your guard when financing a car through a dealer. Keep negotiating the price of the car and negotiating the car loan separate.

Leasing a Car

When car prices went beyond $15,000 to $20,000 for the average cars, dealers knew that had to do something or average people would no longer be able to buy cars. They came up with lease programs.

What are lease programs? Basically, you're renting a car. You sign an agreement that you'll make monthly payments on a car for two to three years. During those two to three years, you also agree to keep the car in good condition and only drive it a certain number of miles. At the end of the agreed upon time, you return the car.

Why bother? This might seem silly, but for people who can't afford a new car, it isn't. Leasing a car has several good points - you get a nicer car for lower monthly car  payments and you get a new car every two to three years.

If you don’t plan on driving a car until it falls apart and plan on having car payments anyway, car leasing may be the way for you to go.

Payment Shaver Loans

Car leases started out as good ideas but are continually getting more expensive. An option to leasing a car are payment shaver loans. With this type of loan, you get low payments just like a lease but get to build equity. There are also no upfront fees or disposal fees that you have with car leases.

Payment shaver loans also have other benefits. At the end of the loan you have several choices.

You can return the car and the balance is paid off.

You can sell the car and pay off the loan balance.

You can trade the car in to pay off the balance of the loan.

You can keep the car and refinance the balance.

Other benefits of payment shaver loans are that you don’t have down payments or security deposits and you'll have higher mileage allowances. Check into this type of car loan for some of the best deals.

Getting the Best Car Loans

The way to get the best car loan is to arm yourself - with information, that is. If you know the different types of car loans are available and which one is best for you, you have confidence. When you walk into a bank or car dealership with confidence, bankers and car salesmen recognize it and you stand the best chance of getting the best deal with the lowest interest rates.

Learn all you can about car loans before you start shopping, know your credit score so you can negotiate, and work out the best car loan that fits your budget.


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    • Debhsmomof4 profile imageAUTHOR


      7 years ago from New York, New York

      Thanks, Simone. Your kind words are always encouraging.

    • Simone Smith profile image

      Simone Haruko Smith 

      7 years ago from San Francisco

      Thank you so much for the helpful overview! I hadn't ever stopped to think of all the different sources of auto loans out there. Most fascinating.


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