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The options can be as mind-boggling as a new-car lot, but some
souces -- like credit unions and online services -- offer clear advantages.
So you don’t have the cash, but that clunker of yours has gotta go.
Congratulations -- you’re joining the 80% of the nation’s car buyers who have
to borrow money.
So now comes the really tricky question: From the myriad financing options
available, which one should you choose? Should you take out a personal loan,
use one of the auto manufacturer’s special financing deals or take out a home
equity loan? And these are only a few options.
This is not a cop-out, but the answer is: It depends. That said, we’ll walk
through the pros and cons of the most commonly used financing methods and
explain when it depends
The car dealer
If you read all of the personal-finance books out, most of them will tell you
that you should secure your financing before you enter the car showroom. The
reason for this is that if your dealer is brokering a loan from a bank or
another financial institution, they may be taking their cut as well.
One exception to this general rule can be special financing or lease offerings
made through the car manufacturer’s own finance company. You frequently see
these offers for special “2.9%” or so financing around the end of model years
and near the beginning of model years for car leases. Sometimes these lower
financing rates are combined with discounts or “cash-back” coupons or rebates
if the manufacturer’s finance company is used.
The global economy also can affect the options you have available. If weakness
in international economies leads to a strong dollar, then manufacturers that
produce their cars overseas may tinker with the sticker price of the car or the
financing available through the car companies’ finance subsidiaries. This, in
turn, puts pressure on domestic car companies to follow suit.
Your bank
But as a rule of thumb, local banks generally offer lower rates than car
dealers, particularly if you’re a customer. If you want a car that is not
currently offering special financing, you might take advantage of lower
financing rates at your bank.
Another tip: A larger down payment may get you better rates from your local
bank. Check out the difference a bank will offer if you put down 10% vs. 20% or
even better, half of the purchase price.
Your credit union
According to Shelly Branch, author of “Dollar Pinching: A Consumer’s Guide to
Smart Spending,” the nation’s 13,000 credit unions often are the best source of
financing for car loans. “Count on grabbing a loan at least a full percentage
point lower than the offerings at your bank,” Branch says.
If you are not currently in a credit union, you can check on your eligibility
to join one by contacting the Credit
Union National Association.
Your home’s equity
Home equity loans have become a popular way to purchase cars. According to
Branch, about 13% of all home equity loans are used at least in part for this
purpose. The reasons are twofold: First, many people have sufficient equity in
their homes to come up with the sums of money necessary to purchase a new car;
and second, home equity interest is tax-deductible, while interest on a typical
consumer loan is not.
You can get either straight home equity loans that let you borrow a certain
amount, or a home equity line of credit (HELOC). A HELOC offers you the option
to borrow up to a certain amount against your home’s equity at any time. It’s
like a revolving line of credit, in which you’re offering your home as
collateral. Don’t ever forget that last point: You’re using your home as
collateral.
For someone in the 36% federal, state and local tax bracket, an 8.5% home
equity loan paid off over five years would save you about $1,921 over a
comparable car loan from your bank. But make sure you actually pay off your
home equity loan as quickly as you would your car loan or you may lose your
home equity loan interest payment advantage.
The bottom line
In the end, how you pay for your new car depends on how you use the car and how
long you’re willing to keep driving it before you turn it in for another one.
In terms of the best deals on regular consumer loans, your best option is
probably a home equity loan, as long as you don’t overextend yourself.
After that, credit unions and the new online banking services seem to offer the
best rates. The one exception may be special manufacturer’s offers to move
their car inventory.
Your last choice should be a personal consumer loan. The rates typically are
higher and there are no tax advantages.
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