Cash is king, that’s no secret, but when you’re making a large purchase like a car, paying in cash isn’t always a reality. The car loan has become the go-to method for most people to finance their vehicles, but is it always the best solution?
Millennials have been accused of not wanting cars, but as the generation matures, more and more are taking the plunge and investing in their own vehicle. Unfortunately, many young people are making bad decisions and financing their new cars with extremely long-term loans. That means a lot of interest and a difficult time if you have to sell the car. So, what are the alternatives?
Using a Brokerage
If you go this route, you will in fact still wind up taking out a loan. The advantage of a brokerage is that someone who is skilled in finance will help you find the best loan for your particular situation. This lowers the chances of being taken for a ride and committing to a 72-month loan with interest you’ll never catch up to.
There is an additional fee associated with using a broker, and that’s the catch if you go this route. Yes, you get the benefit of access to all of the lenders this person works with, and if they are a good broker you might get an inside line on a deal that you wouldn’t typically find. That being said, there is nothing to keep you from securing the same deal on your own, it will just take a little leg work.
Take out a Home-Equity Loan
If you are a homeowner, you’ve got something of value that you can use as currency towards your new car. A home-equity loan or a home equity line of credit (HELOC) can provide you with some fast cash to put down towards your car, and will typically provide a lower rate than traditional financing.
Unlike your typical home loan, a home-equity loan will nearly always have an adjustable rate. That means it’s in your best interest to pay the loan off quickly.
Buy your Car on Credit
Depending on your financial situation, you may have access to a credit card that with a low rate. Even so, it won’t be as law as the financing you can get, so if you’re going to consider this option, make sure the card offers some serious perks, and that you have a plan to pay it off quickly.
Use a Peer-to-Peer Loan
The peer-to-peer financing market is less well known than large lenders, but this option offers some unique advantages. One of the best advantages of a peer-to-peer loan is that you can treat it as cash, which gives you better negotiating power.
Peer-to-peer loans are also unsecured. That means the lending company can’t specify anything about the car you use their money to buy, and if you miss payment they can’t send the repo company to claim your new ride.
You may not get the same rate peer-to-peer that you can from a dealership, but having cash in hand is worth something. Take note that you will need a strong credit score to get this type of financing.
Gifts from Family or Friends
Did you know that your family or friends can lend you up to $13,000 tax-free? That would make a sizeable contribution towards a car. You don’t have to live with the stigma of having mom & dad pay for it if you pay them back, and you’ll probably get a really good rate.
You don’t have to come from affluent origins to make this strategy work, either. Even if it’s for a small amount, you can set up a legal agreement for the loan so that the lending party feels comfortable.
Much like the first option, this is in fact a loan, but it will be a far better loan than you can get through a dealership. USAA is available to family members of those who’ve served in the military. If you qualify, you can get access to some of the lowest lending rates available in the nation and very low down payments.
It’s important not to overcommit on a program like this. If you’ve got no money to put down, chances are it’s going to be difficult to pay off a luxury car. Understand your financial plan before you go into it, as with any loan. Also, give the veteran in your life a big hug and a thanks.
Have a Plan
As we touched on with so many of these options, the most important thing to do before making a major purchase like this is plan. Think about costs you don’t have now that might come in the future. Do you plan on having a child soon that will increase your daily spending? Are you looking at going back to school?
When you feel confident that you can secure the money needed to make your car payments, and a little extra emergency money on top of that, then you’re ready to buy. The more padding you can afford yourself, the better.