Should I finance with the dealership or use my Line of Credit?

As only 3% of people purchase a car from a dealership with actual cash outright, most people have to borrow at least some the money when purchasing a vehicle.  Many people ask this question: Do I borrow the money from a line of credit (LoC) or take out a loan?

What is an auto loan?

An auto loan is a one-time amount that includes the entire purchase price of the car minus any downpayment. For new and certified pre-owned cars, the manufacturer will usually have a low promotional interest rate. For used vehicles that are not certified pre-owned, the rates are determined by a few factors. Facts about loans:

  • Type of disbursement: One lump sum
  • Interest rates: Fixed or variable. usually compounded annually.
  • Rate factors: The interest rate for the loan depends on personal credit, amount borrowed, and length of term. Taking a shorter term will make a higher repayment amount but may reduce the interest rate.
  • Repayment options: Choose from weekly, bi-weekly, semi-monthly and monthly payments. Your payments will be a combination of principal and interest.

What is a personal line of credit?

A line of credit is a reusable amount of money a lender gives you, similar to a credit card. Every month interest is added only to the portion that you have used. Auto dealers don’t offer lines of credit so to purchase a car you have to be pre-approved before.

  • Type of disbursement: A personal line of credit is reusable. Once you are approved for it, you can access any portion of the credit line at any time.
  • Interest rates: Variable. Usually compounded monthly
  • Repayment Options: You pay interest on the amount you use, not the entire credit limit as you do with a personal loan. No matter how much you borrow, all of it plus interest must be repaid by the end of the term.
  • Secured or unsecured: Personal lines of credit can be secured or unsecured. Securing your line of credit by property or investments typically results in a lower interest rate and higher credit limit.

What is a better for me?

Choosing which method is best is not decided solely by the interest rate. There are many reasons for choosing either based on your flexibility needs and if your making other purchases. However, after doing the research,  it’s clear that if the interest rates between both the line of credit and loan are the same and are planning to take more than 3 years to pay off the vehicle, taking the loan at the dealership will provide the lowest payment and interest cost with  flexible terms. This also adds to the convenience of getting approved on the spot and in many cases driving the vehicle away within an hour.

If you would like to find out more about auto loans, shoot me a message, I’d be glad to help!

Ryan McVeigh

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