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What Is the Best Way to Pay for and Purchase Your Next Car?
There are several options available to you when you purchase a car. We will seek to explain the good and bad points of each, but it is ultimately up to you to decide what’s best for your particular circumstances. You can jump to the area most interesting to you by clicking on one of the following links:
Pay Cash
Paying cash for a car is by far the cheapest way to pay for it, but it is seldom the best use for your money. If you hate payments, have a lump sum income, like a tax return, inheritance or you win the lottery, then you may want the thrill of walking in a plunking down a wad of green for your next car. If you want to diligently save for years to do the same thing, that can be equally rewarding.
However, making your cash work for you instead of sitting in your driveway can be a wiser move. If you put that same amount towards the mortgage of your home, you could pay off years of interest, thereby building equity in an appreciating asset and saving you possibly hundreds of thousands of dollars. If you invest it wisely in money markets or stocks it could increase in value every year, instead of depreciating like a car does. A car will always go down in value until it becomes a collector’s item, while many other investments will work for you to make you more wealthy rather than less so.
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Finance Using a Bank
If you have a long-standing relationship with a local bank, they can many times offer extremely attractive interest rates. Because bank rates are linked to the prime rate, they can often be the best available interest rate, especially when rates are declining. Also, a long-term relationship with a local bank can many times be more useful if you get in over your head or have had small blips in you credit history.
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Credit Union Financing
Credit Unions often offer the best rates, especially when the prime rate is escalating. This is because most Credit Union rates are tied to Bonds, not the Prime Rate and they escalate at a slower pace. Also Credit Unions are more local for the most part and sometimes more flexible in difficult credit history situations. However, Credit Union loans do have a “Right of Offset” which allows them to attach and confiscate any and all other accounts if you are delinquent on your car loan.
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Dealer Arranged Financing
Almost always a dealer can find extremely competitive terms in financing a new car. They usually have several sources, including Manufacturer sources that can better any thing else available. These reduced rate loans can sometimes have conditions attached, such as shorter terms or more upfront investment, but they can save you thousands if you qualify.
Dealers offer the convenient, one-stop arrangements through local banks as well, but you shouldn’t pay exorbitant rates for the convenience. While you will buy a new car only every 3-5 years, usually, your dealer will sell and finance one to twenty cars per day and can often qualify for the best rates. It’s not uncommon for a dealer to have access to a better rate with a local bank than the bank employees themselves enjoy. As long as they are somewhat competitive with available rates, using the dealer to arrange the financing is often the best way to go. If you have marginal credit history, Dealers will use the relationship they have built up over years of doing business and you will have an advocate working hard for you.
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Home Equity Loans
Ever since the federal government removed the ability to deduct taxes for consumer loans, some people have used the equity in their home to obtain a loan and buy a car. Technically this portion of a home equity loan is not tax deductible since it is not used for the purpose that the deduction was intended for, but it is still in practice. While being able to deduct the interest paid that you use to buy a car seems enticing, there are some very real risks involved. First is the amount of interest you have to pay. By applying a depreciating asset to your home mortgage of 20-30 years, how much interest will you pay over the life of the mortgage? Even if you can deduct it, you only save on the portion that would be taxed, not the entire amount of interest and you will pay interest for 30 years on a car that you will probably keep for 5. This also removes the ability to use your equity for major repairs, emergencies and to sell the home and have a down payment on the next one.
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Alternative Financing
Many retirement funds, life insurance policies and other appreciating investment strategies offer the ability to borrow against them to purchase a car. If you have enough equity in one of these accounts, it can offer an attractive way to finance your new car. However, be aware of what can happen if you need those funds due to death or unemployment.
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Leasing
Generally, if you own a car less than four years, like to keep a warranty and drive less than 15,000 miles per year, leasing can be a great alternative to buying. When you lease a car, you simply pay for its use, the difference between what it is worth new and what it is worth after you are through with it. You will also pay interest and taxes on the vehicle as well. Your payments are almost always lower than with conventional financing of the same term and can even be the same or lower on a 36-month lease than on a 60-month straight finance. For many people, leasing is the best value and a great way to be able to afford a newer and more expensive car. There can also be some tax savings and easier deductibility if you use the vehicle in a business, but you need to check with your tax advisor to make sure you qualify.
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