It’s great if you can afford to buy a new or used car with cash. Many buyers aren’t in that position though, with around 45% of auto purchases requiring loans. But different financing options are available. So if you need a loan, which borrowing option should you choose? Let’s look at three common types of auto financing and key differences between them.
This is when you finance your car directly through the dealership you’re purchasing from. You’ll often see them advertise their rates and run special financing offers, especially when clearing out their end-of-year stock.
Dealer financing is sometimes easier to get approved for than other financing options. They often offer low-interest rates but, like anywhere else, buyers with strong credit will more easily qualify for those rates. Regardless of your credit score, you can work with a dealership to find an interest rate that fits your budget.
Bank Auto Loans
Another common car financing option is an auto loan from a bank. These can be easier to get than some other bank loans because they’re generally secured by the vehicle itself.
While most bank auto loans are secured loans, occasionally banks will offer unsecured loans for vehicle purchases as well. Just know that going this route can be harder to get approved for, and you’ll probably pay a higher interest rate.
A less common option for financing a car purchase is getting a personal loan from a bank. Because there are fewer restrictions on them and they tend to be unsecured loans, unlike most auto loans, it can be more difficult to get approved for a personal loan to buy a car or truck. You could also end up with a higher interest rate and more loan fees.
Auto loans from a bank may have limits that don’t fit your circumstances. For example, your bank might only offer auto loans for cars up to a certain value.
Let’s say a friend or a family member is replacing their car, and you’re interested in buying it from them. It’s on the older side, but you know it’s reliable and well-maintained. Even if you’re confident you’re getting a good deal, the bank might not be willing to give you a typical auto loan to cover buying it. In cases like this, you might be able to get a personal loan instead. You can use that loan for anything you want, including a used vehicle.
There’s no financing option that works for everyone. Consider the vehicle you want to purchase, your current credit history, and the repayment terms you can afford before deciding on the best option for you.