If it is time to upgrade your current car to a new set of wheels, you may be unsure about your options for financing. Before heading to the dealership, take a moment to learn about some of the most common financing options so you can make an informed financial decision.
1. Obtain a Traditional Auto Loan
Traditional auto loans are available from a variety of companies, including banks and auto dealerships. If you decide to use a traditional loan, it makes sense to shop around so that you can secure the best interest rate on your loan. Traditional loans vary dramatically in terms, from as short as a year to as long as six years. Auto dealerships are known for offering terrific promotional interest rate for buyers with strong credit histories.
To obtain a traditional auto loan, be prepared to show proof of income. Your credit history is taken into account with this type of loan. However, many lenders offer programs for buyers with poor credit. These loans usually come with a higher interest rate.
2. Take Out a 401k Loan
If you have a 401k plan, you may have the option to take out a loan. 401k loans can be used for any purpose and come with attractive interest rates. When you pay the loan back, you are paying yourself back.
When applying for the 401k loan, you are able to pick the term. However, terms are usually five years or less.
One drawback to a 401k loan is that if you are unable to repay the loan, it is considered a distribution from your 401k. Distributions before retirement age incur a penalty in addition to regular income taxes.
3. Put It on Your Credit Card
It is increasingly common for auto dealers to accept credit cards. If you have a card with a fantastic rewards program, you may be able to put some or even all of the purchase price of the car on your card.
Credit cards come with a wide variety of interest rates. If you choose this option, check the interest rate to see if it is favorable. Otherwise, the cost for your credit card interest will quickly exceed any rewards that you earn.
Your credit card payment is a revolving amount that varies based on your balance. Take time to come up with a monthly payment that allows you to pay the charged portion of your car off in a reasonable amount of time.
When you need to finance a vehicle, it literally pays to do your research. By doing so, you ensure that you are securing the best car loan terms possible at a favorable interest rate.