5 Ways to Finance a Car: Their Pros and Cons Compared

Whether you’re buying a new or used car, you’ll quickly find that they are more expensive than ever before. To make reliable transportation affordable, most buyers turn to some type of financing. If you’re not paying cash, you’ll want to look for the lowest auto loan rates you can find.

1. Traditional Auto Loans

If you have decent credit and a down payment, you can get a traditional auto loan. If you make your payments on time, these loans will improve your credit score. But, the best way to get a good interest rate and decent term is to already have good credit. The financing team at your local dealership will run your credit score to build a loan that fits your budget and needs.

Pros:

Affordable monthly payments when terms are extended beyond 48 months
Help your credit score

Cons:

Short-term loans will have high payments
Interest rates increase if you have poor credit

2. Auto Lease

If you’re shopping for a new car and you want a low monthly payment, choose a lease. These function like long-term rentals usually with terms between 12 months and 36 months. At the end of the lease you’ll have to return the car or buy it. All leases have mileage limits and exceeding them can be costly.

Pros:

Affordable monthly payments
You’ll always have a manufacturer’s warranty

Cons:

Mileage limits
Plenty of fees

3. Pay With a Credit Card

If you are buying a used car and you have plenty of space on your credit card, you can buy a car with it. The auto industry has limits to the total you can put on your credit card, but if you have more than one, you can spread out the payment.

Pros:

You don’t need a credit check
Easy way to buy a car

Cons:

Crazy-high interest rates
Can max out your credit cars for extended time periods

4. Get a Personal Loan

Consumers who don’t want to deal with automotive financing can ask for a personal loan from their local bank or another lender. You might already have a line of credit at your bank, and you can use it for car purchases or anything else you’d like. It’s an easy way to buy a car, but beware of defaults, especially if the line of credit is attached to collateral like your home or another high-end asset.

Pros:

No credit check required
Easy way to purchase any expensive item

Cons:

Can tie-up your personal loan or line-of-credit if you don’t pay it off quickly.
Possible higher interest rate than an auto loan
Could be tied to your home or other assets

5. Hire Purchase with 10% Down

This unique auto loan is a good choice for people with poor credit. When you finance a car this way, the car is the security for the loan. You put about 10% down, then make your monthly payments. At the end of the loan, you’ll own the car. This differs from a traditional auto loan where you can sell the car before you pay it off, as long as you pay off what you owe on the loan.

Pros: