The auto market is now starting to rally after the initial shock of COVID-19, and consumers are now ready to get their next new or used vehicle. If you’re in the market for a car, you’ll need to consider which financing options are most affordable for you if you can’t pay the full amount of the vehicle in cash. You also want sure you aren’t paying off a car for an extended period as its value depreciates and interest payments add up.
Traditional Financing Terms
With most traditional auto financing, you’ll agree to a fixed interest rate that stretches out over some time when you purchase your new or used vehicle. You’ll usually have to make a down payment of at least 10% of the final sale price, but if you can make a larger one, you may get better interest rates when financing the vehicle. Going this route can keep your monthly payments on the vehicle consistent and pretty even. The downside is it takes longer to pay off the vehicle, interest payments add up, and there’s usually a penalty for paying off the vehicle early. It’s a good idea when financing a vehicle through the traditional auto loan to compare lenders and go for the lowest interest rate, and even possibly use that as leverage for the dealer to offer you lower rates.
Balloon Payment Auto Loan
A balloon payment auto loan works about the same as a traditional auto loan, but instead of making monthly payments to the end of the loan term, you will only pay those for only part of it. Your final payment will be a large lump sum that will pay off the vehicle completely making you the outright owner. This financing option is good if you only need financing for a short term, and then want to pay off your vehicle with no prepayment penalty. The bad news is if you can’t make the final balloon payment, you’ll need an exit strategy from the loan or the lender could repossess the vehicle. You’ll also usually need a larger down payment for a balloon payment loan than a traditional loan.
If you don’t think you’re going to be able to make loan payments for an extended period, and you want to avoid a balloon payment, you might consider leasing the vehicle. This is a little like renting a vehicle for an extended period, and you simply return the vehicle to the dealer when your lease expires. However, there usually are certain terms you have to agree to such as limitations on the number of miles you can drive it, and a requirement for certain insurance coverage. If you later decide you want to own the vehicle, there may be a carve-out in the contract for that. But you’ll have to read your contract carefully.