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How Should You Finance Your Next Car?

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Buying a car isn't an easy thing to do. There are so many choices even if you don't have much money to spend. Do you go for a new car or a higher spec used model? Even if you know the car and the age and mileage you want, you might find the financing just as confusing. Do you buy a car outright and finance the whole value of the car or get a new car through a lease? What are the pros and cons of each of these approaches? Do you buy from the manufacturer or get a loan from your bank? Which approach is best? We'll take a look at each so you can decide for yourself.

Bank Loan

A bank loan seems like the easiest way to go for some people because they can take out a loan for the exact amount they want to spend on a vehicle and then shop around for the best deal. They won't be encouraged to spend more on the car than they wanted to because they have already agreed and accepted the loan. These customers are cash buyers so they can haggle for a lower price. If you sound like the sort of person who would be more comfortable with this way of buying a new car, you'll normally be pretty satisfied with your purchase.

Car Lease

Why not lease a car? This works well if you like to change your car often. Perhaps you need it for business or you just love having a new car every two to three years. If so, lease it from the manufacturer. You'll need to be the sort of driver who doesn't have a need to modify their car, and you'll also have to be a careful motorist who doesn't leave a lot of marks on the vehicle because those count against you when it comes time to hand the car back.

Buying a Car

If you're going to use the car often, leasing doesn't make sense. That's because car leases have mileage restrictions. If you like to own your car for many years or you like to work on it yourself, you'll need to buy the car rather than lease it as leasing a car comes with lots of restrictions that will bother some drivers. A leased car can feel like a hire car because you know that you'll be charged for every dent when the lease expires.

Commercial Loans

If you need a vehicle for your business, you really should buy it rather than lease it so you're free to choose when to replace the car based on the mileage you put on it and any swings in your company's fortunes. For a long time, a commercial loan from a bank was your best option but that looks to be changing as major lenders are cutting back on the car loan market that's worth an estimated $1.2 trillion in the US alone. A rise in delinquencies seems to be at the core of this change according to date released by Federal Deposit Insurance Corporation in 2017.

Financing

If you can't get a car loan or the rates aren't what you want, you should consider financing the car through the manufacturer. Firms like Ford Credit and GM Financial are subsidiaries of the car manufacturers they represent so they're encouraged to accept customers that banks might turn away as that helps the carmaker sells new cars. You might also find other financial incentives attached to taking out credit directly with the manufacturer like a period of free servicing.

Second Chance Loans

If you can't get credit through a manufacturer or through the bank, you should be able to get a second chance auto loan. This type of loan, which is also known as a bad credit auto loan, is financed through the dealership who will repossess the car if you don't keep up repayments. These loans come with a higher interest rate than other loans and will have to pay a deposit against the car, which may be higher than expected because this will act as a buffer for the dealership if you default on payment.