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from The Complete Car Cost Guide

Sources for Loans

Okay, so paying cash is usually the least expensive way to buy a new vehicle. But in an age when the typical new car carries a price tag of at least $20,000, few people have the requisite pennies in the piggy bank. So, what's the best way to borrow the money? You have plenty of options:

Borrow from a dealer.

Convenience is one reason to obtain a loan from a dealer. At some dealers, it typically takes less than 30 minutes to obtain a loan. Dealers are also more likely than banks to qualify buyers with shaky credit ratings. And the lending arms of Ford, General Motors, and other automakers usually have plans to help customers with special needs. There are "first-time buyer" and "college-graduate" plans for those with no credit ratings. Ford Motor Credit can even set up a flexible payment schedule to accommodate teachers who receive pay checks only nine months out of the year.

But promotional cut-rate financing can be the best reason of all to borrow from a dealer. Ford, for example, recently offered 2.9% and 5.9% financing on some models at a time when prevailing bank rates were around 9 to 10%. Such deals can be true money savers. Don't however, expect manufacturers to offer discount financing on hot-selling models.

And the downside to dealer financing? Dealers obtain loans for their customers through local banks and finance companies, as well as through the automakers and lending arms. Dealers usually add a bit to the interest rate over what they pay for the loan, keeping the difference as profit. Persuasive dealers working with uninformed buyers can make as much off financing a new car as they can on the car sale itself.

Borrow from a bank, credit union, or finance company.

In contrast to obtaining a loan through a dealer, borrowing from a lending institution tends to be haggle-free. Lending institutions usually offer set, nonnegotiable loan rates. And they're less likely to push credit life insurance- an unnecessary, expensive frill. Compared to banks and finance companies, membership credit unions typically offer the lowest interest rates. Finance companies are often the most expensive.

Borrow on a home-equity loan.

Transforming a part of your home's value into a new Mustang has one great advantage: Unlike the interest on a car loan, the interest on a home equity loan is usually tax deductible. If you're in a high tax bracket, you can save as much as 40% on interest costs by buying a car with the proceeds from a home equity loan.

The danger is that your house, not just your car, is on the line if you can't make the payments. Moreover, revolving credit lines based on home equity require you to make payments of only interest, not principal. If you don't have the discipline to pay the principal you could easily end up with a depreciated car worth little or nothing and a huge loan against your house. In addition, start-up costs: including property appraisal, title search, and lender points can be substantial if you don't already have a home-equity credit line.

Borrow on investments or insurance.

If you own a large portfolio of securities, a passbook savings account, a 401(k) savings account, or a cash-value life insurance policy, you may be able to borrow against them at attractive interest rates with flexible or even no repayment plans. But with any of these loans, you're hocking some element of your future. If there's a margin call against your security loan, you might be forced to sell your stocks and bonds at a big loss. Or if you died while your insurance-policy loan was outstanding, the proceeds to your family would be reduced by the loan amount.

1998 The Complete Car Cost Guide™ IntelliChoice® Inc. Campbell, CA