You’ve found the car that makes your heart race at 120 beats per minute. Now only one thing stands between you and the car of your dreams: financing the purchase. In a perfect world, you’d pay the full price in cash without blinking. But if you’re like the seven out of ten car buyers who don’t live in a perfect world, chances are you’d be paying for your car through one of several financing institutions.
Understanding the basics of each car financing strategy is key to choosing the vehicle financing strategy that best suits your situation. Here is an overview of vehicle financing strategies that may be available to you.
Banks and Vehicle Finance Companies
You can get a car loan from a bank, or other financing institutions. The car that you purchase will serve as collateral for the vehicle loan. This means that the lender can repossess the vehicle if you default on the agreement. Vehicle loans are a popular car financing option because they generally offer reasonable interest rates and are relatively easy to get.
Two factors are likely to affect the total cost of the car loan. One is the term or duration of the loan. Generally, the longer the term of the loan, the lower your monthly installment will be. But you’ll end up paying more towards interest and this will increase the total cost of the auto loan. If you can afford it, get a short-term loan. Your monthly installment will be higher, but you’ll be paying less money over all. The second factor that may affect the total cost of your car loan is your credit rating. Creditors with less-than-stellar credit history are usually charged a higher interest rate because of the higher credit risk.
Like traditional auto loans, dealer financing is reasonably easy to get. Most dealerships have relationships with numerous lending institutions, so they can arrange vehicle loans even for car buyers with blemished credit histories. To compete with traditional bank financing, many dealerships offer deals at prime less a few percent. These deals are available to car buyers with stellar credit ratings.
Always get pre-approved financing form your bank or any other financing institution before approaching the dealership for possible financing. By getting loan pre-approval from another financing institution, a car buyer gets the upper hand when bargaining for a lower rate on dealer financing.
Using Your Mortgage To Finance Your Vehicle
If you own a home and have accumulated substantial equity on your property, and you have a facility that allows you to withdraw any equity like an access bond, then you may consider using your mortgage to finance your vehicle purchase.
The interest rate on your mortgage is usually lower than the rate you will get on any vehicle financing agreement so you could end up saving a considerable amount of money if you use this option. You need to be disciplined with this approach and pay the vehicle over the life of the vehicle 48 – 60 months (as if it were any other vehicle financing arrangement). The temptation to pay the vehicle off over the term of the mortgage might result in lower monthly payments however with the added interest you will end up paying much more for your vehicle.
Used correctly this strategy provides one of the cheaper ways to finance your vehicle and is the basis of single credit facilities offered by banks to High Net Worth Individuals.
Buy Your Vehicle Cash
Few people are fortunate enough to be able to purchase a new vehicle cash, however if you have the means then this is the cheapest option as you won’t be paying interest / finance charges.
Banks don’t generally finance vehicles that are older than 5 or 6 years and buyers in this sector of the market typically finance their vehicle purchases using cash resources.
Even though it may be the cheapest option from an interest rate / finance charges perspective, if you use the vehicle to generate an income or receive a car allowance then financing your vehicle via a lease or rental and claiming the deductions permitted in terms of the Income Tax Act may actually work out cheaper.