If you're in the market for a vehicle, you have various options available to you based on the year of your car, your credit history and even your driving habits. Interest rates range from zero percent to 29 percent, depending on your credit and state. Learn about the options for vehicle financing so you can make a financially beneficial decision based on your driving needs and budget.
Options
If purchasing a used car, you can finance through a bank of your choice, including local banks such as a credit union or nationally based lenders with a local presence, such as HSBC, Bank of America or Chase. For new vehicles, conventional methods include the same options, but in addition you can lease your vehicle or obtain low rate financing through a dealership manufacturer's bank, such as Ford Motor Credit, Volkswagen Credit, GMAC, etc.
Benefits
Conventional methods of financing provide benefits for all kinds of drivers and borrowers. For buyers who do not drive over 15,000 miles per year and enjoy purchasing a new car every three years, leasing is a low payment option. During the lease, the bank owns the vehicle and you pay for the time you use it, which usually results in a much lower car payment than a comparable finance. In addition, you do not have to consider future market value, or trade-in values, because the bank assumes it instead. For consumers who prefer to own a car, keep one until it no longer works or drive too many miles to obtain a lease, a traditional finance, in which you borrow the vehicle's value to own outright at the end of the term, is a common means of vehicle financing.
Lenders
Other than leasing, which requires you to use the manufacturer's bank, you can finance through different lenders depending on the state of your credit. The same manufacturer's banks that offer leases also offer incentives to finance, such as zero-percent or other low rate financing, but you must go through the dealership. National and local lenders often compete with each other to offer the lowest rates available, but rarely as low as the rates the manufacturer's bank can offer. Sub-prime lenders, such as Capital One or Road Loans, lend to riskier buyers with fair to bad credit. Sub-prime rates are not competitive and money down is usually a requirement, but may prove the only option for borrowers with poor credit. Large dealerships usually work with a variety of lenders, not just the manufacturer's bank, which include all mentioned loan providers. You can also seek out these banks online or go to one in person to apply, as subprime lenders are not local to all areas.
Considerations
While low rates may seem like good reason to buy, not everyone will be approved. Manufacturer offers are usually the most lenient, and while you do need good to excellent credit to qualify for competitive offers, you are either approved or you are not. Traditional lenders use a tier scale for rate determination instead. Many borrowers will achieve a sightly higher interest rate than the ones seen advertised on websites, meaning that the borrower did not achieve the bank's top tier rating. Still, even with a low tier rating and higher interest rate, you are likely to obtain a better rate from a traditional lender than from a sub-prime lender; rates are as high as 29 percent in some states.
Exceptions
Some loan exceptions to apply for borrowers and the car they choose. Conventional lending options have requirements based on credit, personal information and age or mileage of vehicle. For example, low rate advertisements are usually for a loan period of up to 60 months, although you can finance longer. Expect rates to change after a 60 month term. The bank also determines your debt-to-income ratio to decide if you can borrow the requested loan amount by determining the maximum payment you can afford based on the income and debts listed on your credit application and report. Lenders also look at loan-to-value ratios, which is the value of your vehicle compared with the amount and term you wish to borrow. You cannot borrow $10,000 for a vehicle that has a value of $5,000 no matter how good your credit is. Also, this same vehicle cannot be financed for 84 months; the bank prefers depreciation to remain relatively close to the loan's payoff amount.
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