Financing a Car: What Are Your Best Options?

Between having the option to get a loan, get a lease, or finance your car in so many different ways, it can be overwhelming to decide what is the ideal outcome for you. So, in this guide, we’ve gone over some of the smartest ways to finance your car.

What Is the Best Way to Finance a Car?

1. Auto Loan

A traditional auto loan from a bank or a credit union is one of the best ways to finance your car. This is because these types of loans come with the most affordable interest rates, and they are also adaptable to someone with bad credit, as the lender can use the car as a way of collateral.

This option allows you to get ahead of your budget, you know your interest rate before committing, and there’s no dealer markup on the interest rate.

For example, if a lender preapproves you for $25,000 at 6% for 60 months, you walk into the dealership already knowing what your price range is, and you don’t waste time shopping around for cars that are outside of your budget.

Where to Get an Auto Loan?

• Banks (including ones you don’t currently use)
• Credit unions
• Online lenders that specialize in auto loans
• Through the dealership (we don’t recommend this option as it comes with higher interest rates).

2. Leasing a Car

Leasing a car is a way to finance your vehicle by paying each month to use the car, but you don’t own it. This way of financing can make sense if you want lower monthly payments, want to drive a new car, and don’t drive a lot of miles each year.

It’s important to remember that leasing comes with a few limitations, e.g., how many miles you can drive in your car, so it’s not ideal for many people.

3. Paying in Cash

Paying in cash, if you can afford it, is one of the smartest ways to buy a car because it helps you avoid taking on debt altogether. This can be especially important if you already have other loans and don’t want to add another monthly payment to your budget.

If paying cash for a brand-new car isn’t realistic, it’s worth looking at used vehicles instead.

And even if you don’t have enough cash to cover the full cost of a car, putting down a larger down payment can still make a big difference. A higher down payment reduces how much you need to borrow, which can lower your interest rate and save you money over the life of an auto loan.

4. Personal Loan

You can also take out a personal loan and use it to finance your purchase. There are some people who do a combination of both; they take out a personal loan to pay for the down payment of the car, and then an auto loan to pay for the rest.

While it’s becoming a very common way to finance a vehicle, it comes with higher interest rates, and you might not be approved if you have a low credit score, so it’s a good idea to check out the details of the loan before signing.

Bottom Line: Which Option Is Ideal For You?

In the vast majority of cases, an auto loan is the best option, especially if paying in cash isn’t an option. It comes with predictable payments and realistic interest rates.

That said, not every person’s financial situation is the same. For some people, leasing may be a better option, and for others, a personal loan. Before deciding, take a realistic look at your budget, income, savings, and credit profile. Factors like how much you can put down, whether you have a co-signer, and how long you plan to keep the car should all play a role.

Remember: the best option is the one that keeps your monthly payments the lowest and doesn’t strain your budget.