Automotive Loans: Types of Financing

by Amy Lillard

(1/2/2013) Few people have the cash or the desire to buy a car outright. Financing, or taking out a loan to pay for the car over time, provides an important option. For many new to the car buying process, and for those craving as simple a trip to the dealership as possible, financing provided by the car dealer may seem like the only option for taking out a car loan . However, there are multiple sources of financing for people looking to buy a car.

• Dealer loans. Car dealerships partner with key banks, credit providers and other financiers in order to provide car loans at the time of purchase. While these loans can be convenient and quick, they may feature markups in rates and fees.

• Bank and credit union loans. Working directly through your own bank or a bank you've identified can provide greater control over loan terms, and the familiarity of an already existing relationship.

• Online loans. The expansion of online shopping and banking mean consumers have more options than ever when it comes to getting a car loan. Trustworthy and established online lenders can provide the same security as a typical bank and credit union loan, with a bit more speed and convenience. And the ability to shop for and compare multiple loans can mean lower rates.

• Home equity loans. For homeowners, a home equity loan leverages the equity in the home to provide a credit line or a full loan, which can be used for purchases including cars. A major bonus from these loans: Interest is typically tax-deductible.

From each of these sources, consumers can obtain a short or long-term car loan. Short-term loans are for up to three years and feature larger monthly payments in exchange for lower interest rates and a shorter pay period. Long-term loans can be spread up to seven years. The longer duration provides smaller monthly payments, but more interest is paid over the life of the loan.

In addition to all these options, consumers have another — leasing. A typical car loan allows consumers to pay down the loan and eventually own the car. In the process, buyers must provide a down payment and pay a substantial chunk of interest. Leasing provides an option similar to renting, with a lower down payment, monthly payments, and maintenance. However, consumers do not own the car at the end of the lease — they must either buy the vehicle then or begin another lease.

A frequent contributor to ERATE® since 2006, Amy Lillard is a freelance writer specializing in turning complex information into useful tips and tricks for readers. For questions or topic suggestions, contact Amy at [email protected].

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