The Pros and Cons of Financing a Car

Getting a car loan can help you spread out your expenses and build your credit, but it also means you’ll pay more in the long run due to interest.
Written by Mary Alice Morris
Buying a new car can be a lot of fun, but it also requires a lot of homework. While there are benefits to getting a
car loan
, there are also disadvantages—like paying more for the vehicle in the long run. 
  • Financing allows you to buy a new or used car if you don’t have enough cash on hand.
  • The interest charged for a car loan means you’ll pay more for the vehicle over time than if you were to pay in cash.
  • Due to the vehicle’s depreciation, you may end up with an
    upside-down car loan
    for a time.

What are the pros and cons of financing a car?

There are benefits and disadvantages to getting a car loan. 
Luckily, there are several different ways to pay for a new car: 
  • Buy a car outright: If you can afford it, this means paying the full price out of pocket in a lump sum. 
  • Finance a car: This means getting a loan, which you will pay back in installments with added interest. 
  • Lease a car: This is basically a long-term rental agreement where you’ll pay in monthly installments but won’t keep the car in the end. 
Here, we’ll focus on a car purchase without paying the entire sum up front but still gaining full ownership of the vehicle—aka taking out a car loan.
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The pros of getting an auto loan

Pros of financing a car
Cons of financing a car
Allows you to buy the car without having cash on hand
Depending on your credit profile, interest rates can be high
You can modify/customize the car before it’s paid off
You’ll be responsible for interest and fees for the loan
Making timely, consistent payments can help build credit
The car can depreciate quickly. You may end up owing more than the car is worth for a time
The car is yours after the loan term expires
car can be repossessed
if you fail to pay on time

What are the financing options for getting a new car?

A car loan is an agreement to make monthly payments with the end goal of owning the car. The car eventually belongs to you—but by the time it’s paid off, it will have depreciated significantly.
Here are some of the options you have for getting a car loan:

Dealership financing

Car dealerships often have their own financing department and offer loans to customers. This is a convenient option, and the application can be processed quickly while you’re at the dealership.
It also opens up avenues for financing that may not be available elsewhere to people trying to buy a car with bad credit
Those benefits come at a cost, though—mainly in the form of higher interest rates than other auto loans. 
With a dealership, the lender will likely end up being a national company, which means you won’t have the face-to-face relationship that you get when taking out a loan with a credit union

Bank loans

Going to your bank for a loan can be beneficial in that you could work with someone who knows you and is familiar with your credit portfolio. They may consider your personal factors when evaluating your loan eligibility. 
However, banks are much more cautious when lending than most financing departments at dealerships. They’ll carefully put together a loan package that best ensures you’ll be able to pay it off. That might mean the loan amount extended to you is less than what you desire. 
Further, banks may also charge higher interest rates than other lenders. 

Credit union loan

Credit unions tend to offer much lower interest rates on car loans. This is in part because credit unions are nonprofit organizations. 
However, a drawback of some credit unions is their accessibility (or lack thereof). Many credit unions require you to be a member to use their services. Becoming a member may entail paying a fee, opening a new account and maintaining a certain balance, or meeting other requirements.

Online car loan marketplace

Just like the online mortgage marketplace, you can now compare lots of loans using an online service, such as
. This allows you to compare interest rates and terms from several lenders at once. 
But again, it lacks the personal touch of using your own bank or credit union.
Make auto loan refinancing easy with PriceProtect™
Make auto loan refinancing easy with PriceProtect™
icon4.7/5 rating on the App Store | Trusted by 5+ million customers and 7 million cars
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How to get the most out of financing a car

No matter what route you’re thinking of taking, it’s worth it to shop around for quotes from various lenders before settling on an institution.
Here are some other to secure a better deal if you’re looking into car financing:
  • Maintain good credit: Lenders reserve their lowest interest rates to buyers with higher credit scores, while those with poor credit will pay more. If you have bad credit, consider taking steps to improve your credit score before buying so you can find a better loan rate.
  • Make a higher down payment: In many cases, you’ll be required to put down some sort of down payment to secure a car loan. The higher your down payment, the less you’ll pay in interest over your repayment period. Experts commonly recommend making a 10-20% down payment when possible.
  • Know what you can afford: Before applying for your car loan, establish a car-buying budget so you can avoid deals that will leave you with higher monthly payments. Loan calculator tools can help you estimate your loan payments based on different purchase prices, interest rates, down payments, and loan terms.
  • Refinance: If your credit score has changed or economic circumstances have improved since you took out your car loan, consider using a
    refinance comparison tool
    to get new loan terms that save you money.
“When using
, I just put in a bit of information, and they found lots of different quotes for me. I was paying $305 a month for two brand-new cars, but now I’m paying $150 a month for both with full coverage!” —Robin U.
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It depends on your credit profile and the terms of your car loan. You’ll want to research
car loan interest rates
to make sure you’re getting a fair deal. And if your credit is an issue, there are a few things you can do to help improve your credit score. 
But for many consumers, a car loan makes new car ownership possible and affordable, allowing payments by installment along with added interest.
Initially, it might—but making your payments on time should cause your score to bounce back. 
Your credit score could drop a little after taking out a car loan because the amount of your debt has increased. But if you commit to paying on time regularly, the loan could actually help build your credit score.
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