The greatest symbol of American independence just might be the car. Whether going to work, dropping the kids off at school, or buying groceries, owning a vehicle is a basic expectation for day-to-day needs and road trips both epic and small.
But cars and trucks aren’t cheap. Unless you have a lot of savings in your bank account, the only way to afford to purchase a car is by financing them.
There are several vehicle finance options available and since vehicles are depreciating assets, it's critical to choose the option that yields the best choice for you to get the lowest loan payment available.
There are several options for a vehicle purchase and it’s important to know what’s available. Here are some options you have while shopping for automotive financing.
Consumer Direct Financing
In consumer direct financing, you borrow a loan “directly” from a bank or other financial institution to buy a vehicle. The first option would be to apply for a pre-approval and then purchase a vehicle that best fits your budget. You can also apply for the loan after you have found the vehicle you want to purchase and have a price in hand.
The best thing about direct consumer financing is that it allows you to compare loan rates among several lenders so that you can get the best deal. Also, if you get a pre-approved loan, you can purchase a vehicle under your budget and you won’t spend more than you can afford.
On the downside, direct financing is a little more complex and isn’t efficient. It can be time consuming to compare several lenders and is not favorable when you need to urgently purchase a vehicle.
Consumer Indirect Financing
Indirect consumer or dealership financing refers to when the retailer or dealer helps you borrow the money to purchase a vehicle. It’s similar to direct financing, but this option allows the buyer to acquire a loan indirectly with a lender through the help of the retailer or dealer.
The dealer has networks and partner financial institutions where they can help you apply for loans with several lenders in their network. Since the lenders are partnered with dealerships, there is a high chance for your loan to be approved, and you can get a loan at a good rate.
The best thing about dealership financing is that the loan process is very convenient since dealers are working to obtain the loan on your behalf. There is a high chance of negotiability since the dealership is familiar with each lender and can help you get the loan at discounted rates.
It’s wise to keep in mind, however, that dealership financing is not transparent since the dealer is doing all of the work for you. The dealership may impose a higher interest rate without your knowledge or include additional fees which may cause you to pay much more for your vehicle than if you obtained financing independently.Flexibility and a lack of options are also minimal since you are only applying to the lenders within the dealer’s network.
The final option would be to apply for a personal loan to finance a vehicle instead of a dedicated auto loan. Personal loans are unsecured loans that are borrowed based on credit scores and credit history. comparatively, auto loans are secured loans in which the vehicle itself is kept as collateral.
The purchased vehicle isn’t considered collateral in a personal loan. Thus, if you are looking to obtain a loan without the risk of repossession, you can take out a personal loan to purchase a vehicle.
Personal financing options don’t require a down payment, and they are less restrictive. You can take out personal loans based on your credit scores and profile. This means hat if you have a good credit score, you can easily get a loan approved to purchase a car without any restrictions.
There is a major drawback to personal financing, however, as it is expensive to purchase a vehicle due to higher interest rates than what a dedicated auto loan would offer. Also, personal loans are only offered in shorter terms compared to auto loans, resulting in higher repayments.
While there are multiple automotive financing options, you must choose the type that works best for you and your situation. There are pros and cons to all of the above mentioned loan options, it's up to you to pick the best one. Are you shopping for a omnichannel consumer engagement solution for your dealership, BDC company, or automotive business? We provide communication solutions that convert leads into long term customers. For more information check out our automotive page or schedule a demo with us.