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What are the Different Types of Car Financing?

By Shannon Kietzman
Updated May 23, 2024
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There are several ways one can obtain car financing, with a personal loan being one of the most popular methods.

Purchasing a car with a personal loan allows one to borrow money from his or her chosen financial institution. It also makes it possible for the buyer to ultimately pay for the car entirely. As a result, the buyer owns the car completely. Since the debt owed on the car is paid off through personal loan car financing, the car owner also has the freedom to sell the car or to trade it for another.

Hire purchase is another type of financing for cars. This method involves forming an agreement between the used or new car dealer and the buyer. In this arrangement, the buyer is asked to pay a deposit of anywhere from 10 to 20 percent of the total price of the car. Monthly payments are then set based on the amount of money still owed. With this type of financing, the car is not fully owned by the buyer until all monies are paid off.

Re-mortgage is another choice for car financing. This method is specifically designed for homeowners. With this method, the buyer can re-mortgage his or her home and use the extra money to purchase a car. For those who own property and have an existing loan, the same idea can be implemented with refinancing the loan. Refinancing allows the borrower to get more money from his or her financial institution, which can be applied toward car financing.

Interest-free car financing and personal contract purchase are other popular methods. Interest-free car financing is usually offered only with new cars. With this type of financing, the buyer can get a new car without paying interest on the total cost of the purchase.

Personal contract purchase, on the other hand, is commonly used with banks. Monthly payments are extracted from the buyer’s bank account for a minimum of two years and a maximum of four years. The borrower and bank account owner then has the choice to either pay off the car via a lump sum payment or to return the car after this time period is complete.

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Discussion Comments
By suntan12 — On Apr 20, 2011

@Mutsy - I know that a car lease is tempting, but the problem is that it is hard to get out of the cycle of leasing and you do have to pay for excessive wear and tear as well as excessive mileage.

I think if you finance your car you can view different car finance options online to see which deal is best. If you go to the manufacturer’s website and look at the dealer locater and put your zip code in, it will give you a list of dealerships in the area.

If you request an online financing quote, they will email it to you so you can have a good idea of what type of payments you are looking at before you even leave your home. This is a good way to negotiate the financing because many people are focused on the monthly car payment, but it is a mistake to stop there.

You should really consider getting the overall price down and then try to negotiate the interest rate. If you have excellent credit you should be able to get a lower interest rate than what the dealership initially quotes you. I did this and after they checked my credit report and they had no problem lowering my interest rate. You never know until you try.

By mutsy — On Apr 19, 2011

@Icecream17 - I totally agree with you especially in a down real estate market. You really can’t afford to pull out more equity from your home. I think that another option when considering buying a new car is the lease option.

Although with the lease option you are not technically purchasing a car, you can still have significantly lower car payments and probably drive a more luxurious car. The catch is that you have to return the car in good condition and within the mileage allotted after the lease term is up.

Many leases allow you to purchase the car at the end of the lease but I heard that the purchase price at that point might be a little higher than what you can buy the car for on the open market. I know that a lot of financial advisors are against leasing a car because they say that you have to come up with a new down payment every three years or so and you never build equity in the car, but some people like the idea of a lower car payment that is maintenance free because most dealers will cover the maintenance of the car during the lease.

I think that the only things they don’t cover are things like oil changes or wheel alignments. I used to lease cars and it was fun for awhile because I got to drive some really nice cars that I probably could not afford to buy otherwise.

By icecream17 — On Apr 18, 2011

@Cupcake15- I agree with you. What I did want to add is that taking out equity from your home in order to finance a car may not be the best idea because if you default on your loan in that case you can lose your home.

I have a home equity line that I used for the purpose of buying another property and it states that this type of loan is a recourse loan, so if I default on the loan the bank can force the sale of my home in order to get the money owed to them.

While I understand that car loan financing is easier when you use the equity of your home because it is less risky for the banks, the downside is really scary. You just have to be careful.

By cupcake15 — On Apr 16, 2011

I think that getting a car financed through a credit union is ideal because many dealers add additional charges in the financing of a car. The credit union will also only offer you what the car is worth, so if the dealer happens to have additional charges they may be forced to drop them.

Having financing from a credit union will give you a better negotiating position than when you have to rely on the car dealerships financing. The dealership also markups their finance charges from what their banks quote them, so this avenue can cost you a little more because dealerships do make money from the financing as well.

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