Automobile Financing Options for New and Used Cars

Most people can't pay cash for a new or used car, but fortunately there are options for financing the purchase of a vehicle.

We need all the leverage we can get when negotiating the purchase of a new or used car, and one of the best ways to get terms to swing favorably our way during the deal is to take the financing element out of any discussions with the dealer. That can be achieved by getting a preapproved automotive loan from an independent bank. Banks can provide qualified applicants with loans for either new or used car purchases. A higher interest rate is charged to applicants with lower FICO credit scores. So it pays to keep personal credit history in good standing. Banks will also typically charge higher interest rates for purchases of used cars. Used car loans are commonly perceived to be more risky due to the advanced age of the cars involved in the purchases.

It is also possible to get a dealer-arranged car loan. These loans are typically more expensive than what is available from an independent bank, because dealers add additional financing fees as high as 2.5% to help them generate greater profit. In recent years car manufacturers have also been inclined to offer numerous incentives to entice new customers into their dealer showrooms. It's common to be offered a choice to either purchase a car financed with an extremely low interest rate, or to receive "cash back" via the purchasing transaction. It is generally more cost efficient over the life of the loan for buyers to take the cash incentive rather than the low interest loan. So this is another reason why it is a good idea to obtain preapproval for an automotive loan from an independent bank before going to a dealer.

Another popular option for financing the acquisition of a new car is through a carmaker's leasing program. The attraction for buyers is that a very low down payment is required. The monthly payment is impacted significantly by an assumption of the car's residual value at the end of the lease term. The disadvantage with the leasing option for the buyer, is that there is nothing at the end of the lease term to show for the rental payments already made for the car.