You have found the car that’s perfect for your needs. Now only one thing stands between you and the car of your dreams. Ideally, you would pay the full price in cash without thinking. But if you are like the seven out of ten of car buyers who do not live in a perfect world, then chances are you would be paying for your car through one of several financing schemes.

Understanding the basics of each car financing option is key to choosing the automobile financing strategy that best suits your situation. Here is an overview of auto credit options that may be available to you.

Auto Loans from Lending Institutions – You can get a car loan from a bank, credit union, or other lending institutions. The car that you purchase will serve as collateral for the auto loan. This means that the lender can repossess your vehicle if you default on the car loan. Auto loans are a popular Auto 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 Auto loan. One is, the term or duration of the loan. Generally, the longer the term of the loan, the lower your monthly instalment will be. But you will 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 repayment will be higher, but you will be paying less money over all. Another factor that may affect the total cost of your car loan is your credit rating. Borrowers with a poor credit history are usually charged at a higher interest rate because of the elevated risk.

Home Equity Loans – If you own a home and have accumulated substantial equity on your home, then you may consider getting a home equity line of credit. Home equity loans – sometimes referred to as HEL’s – are fixed or adjustable interest loans that you repay over a predetermined period. Home equity loans are open-ended, adjustable interest loans with a maximum credit limit based on the equity of your home. Most Home equity loans tend to have lower interest rates than credit cards and other types of personal loans. Interest rate payments on home equity loans may also be tax-deductible up to a certain extent. An important warning Home equity loans use your home as collateral against your potential inability to repay the loan, so make sure you are financially capable of repaying the monthly instalments if you do not want to run the risk of losing your home.

Dealer Financing – Like traditional auto loans, Dealer financing is reasonably easy to get. Most dealers have relationships with numerous lending institutions, so they can arrange car loans even for car buyers with blemished credit histories. To compete with traditional bank loans, many dealers offer zero per cent or very low interest on dealers loans. However, such loans are available to car buyers with stellar credit. Consumer experts advise auto buyers to get pre-approved on an auto loan from a bank or credit union before approaching the dealers for possible financing. By getting loan pre-approval from another lending institution, an auto buyer gets the upper hand when bargaining for a lower rate on a dealer loan.

Credit Cards – Borrowing from your credit card, also known as a credit card advance can help you to obtain your dream car. Like home equity lines of credit or credit card advances are lines of credit with variable interest rates. To entice existing customers to take advantage of credit card drafts, credit card companies will often waive cash-advance fees, whilst ensuring low rates during the initial period of the loan, or alternatively offer high credit limits. However, because credit card drafts are unsecured, they generally have higher interest rates than the other forms of financing discussed previously such as traditional auto loans, dealer loans or home equity loans. Financing your auto purchase through credit cards could also leave you vulnerable to hefty penalties if you make a late payment or happen to exceed your credit limit.

Friday, July 15th, 2011 at 6:21 pm
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