Should You Use a Private Car Loan or Dealer Financing?

When it comes to financing your new car purchase, you’ve got a couple of options.  If you aren’t independently wealthy, you’ll probably need to get financing from either a private lender or from the dealership where you buy your car.  Read on to learn more about each of these two options:

Private Auto Loans

Private auto loans are issued by a number of different lenders, including well-known banks and internet-based creditors.  If you do an internet search for the terms “car loan”, you’ll probably see dozens of advertisements for these lenders, bragging about their low interest rates or their ability to work with bad credit borrowers.  Typically, in order to qualify for a loan from any of these sources, you’ll need to submit information on your income, your credit rating and any other outstanding debts you hold.  Depending on your information, the lender will approve you for a certain amount of money at a certain interest rate.

One reason that many people prefer to take out private auto loans is that they can get better rates with private loans than with what the car dealer is offering.  Car dealers that offer their own financing are counting on the interest from your loan as part of their profits, so their rates are sometimes higher than private lenders.  In addition, dealerships may be less willing to work with buyers with poor credit or no credit.  If you fall into one of these categories, you may need to take out a private loan at a high interest rate to have access to loan funds.

However, there are a few things you should be aware of when taking out private auto loans.  First, your lender may approve you for more than you can actually afford to pay.  This is why it’s so important to spend some time on your budget, to determine what you can truly afford to pay in terms of car payments, insurance and maintenance costs.  If your lender offers you $15,000 and you’ve determined that you can only afford the payments on a $10,000 loan, don’t spend the extra $5,000 just because you have access to it.  If necessary, ask the loan company to lower the amount so that you aren’t tempted to overspend.

Dealer Financing

One of the few good things that can be said about the current economic situation is that it’s making it even easier to get a great deal on major purchases, like houses or cars.  Because fewer people are buying, auto dealerships are anxious to unload the inventory that’s been sitting in their lots for months.  As a buyer, you can take advantage of this anxiety to negotiate on both the actual price of the car and the terms of their financing options.

For example, when you begin negotiating for your chosen vehicle, the dealer will likely throw out a low-ball interest rate in order to keep your estimated monthly payments low.  Once you’ve agreed on the price of the car, the salesperson will typically run the numbers and report back to you that you don’t qualify for the low rate they’ve quoted – you, in fact, qualify for a rate that’s several percentage points higher.  Obviously, this results in a higher monthly payment on your end.

However, don’t automatically sign the documents anyways.  In this market, car salespeople are making fewer sales than ever, so they don’t really want you to walk away from the table.  Instead, negotiate with them to get back down to the original monthly payment they quoted you.  Because they’ll be making money off both the loan and the car, they’ll be much more willing to work with you to make the numbers meet.