The first step towards buying a new vehicle, after choosing it of course, is arranging the money for it. On an average, three out of ten potential buyers never need external financing for money, the other seven just cannot buy it on their own. There are a lot of options and corresponding catches in car financing so prospective buyers get confused. To choose the best of the available financing for automobile purchasing, one needs to understand the basics of each of the options.

One can get an automobile loan from multiple lending institutions, banks and credit unions. The security or collateral for these types of loans is the vehicle being purchased. In simple terms this would mean that the loaner or the lender can snatch the vehicle in case of non-payment of the loan. The advantages of auto loans are their reasonable interest rates and relatively easier availability which makes them the most popular car financing option.

The total cost to be incurred by a loan is decided by two factors mainly – term or duration of the loan and credit rating. Basically, a longer term loan implies lower monthly installments in lieu of higher interest rates. This interest rate in turn increases the total cost of the auto loan. Hence a short-term loan is recommended which may result in higher monthly installments, but lower overall costs at the end. The credit rating factor determines the total amount of money which can be loaned to a person, based on his past performance. The creditors with a not so impressive credit history are charged a higher interest rate to cover the credit risk and hence the overall cost is increased.

An alternative of the conventional auto loans is dealer financing. These types of loans are also easy to get. An advantage with this financing is that as many dealerships have relationships with most of the lending institutions and they offer car loans for people with blemished credit histories too. Also, many dealerships offer zero percent or very low interest on dealer loans for car buyers with stellar credit ratings to compete with the traditional bank loans. It is recommended that the potential buyers get their loans approved from a bank or credit union and then approach the dealership for possible financing as it gives the car buyer an upper hand when bargaining for a lower rate on a dealer loan.

There is also an option of home equity loans and home equity credit lines for car loans. These types of loans require the possession of a home or an accumulated substantial equity on the property. Generally, home equity loans are fixed or adjustable rate loans that can be repaid over a predetermined period, while the home equity lines of credit are open-ended, adjustable-rate revolving loans where the maximum credit limit is usually based on the total equity of the home. It is observed that the home equity loans have lower interest rates than credit cards and other types of personal loans. Moreover, the interest payments on home equity loans are tax-deductible to a limit. The only thing to ensure is the capability to pay the monthly installments as the home is on collateral and eventually there is the risk of losing it.

The credit cards companies offer sufficient advance and over draft to buy the car. These types of loans are revolving lines of credit with variable interest rates. Generally, the credit card companies waive cash-advance fees, guarantee low rates during the initial period of the loan, and offer high credit limits to encourage the existing customers to avail themselves of credit card drafts and loans. Usually, credit card drafts have higher interest rates than home equity loans, traditional auto loans or dealer loans due to high risk. The point to note is that in case of late payments or the credit limit being exceeded, it will result in hefty penalty charges.