Dealer Financing

If you can qualify for an automaker's discount financing offer, then the dealer will help you arrange the loan. Even if you can't qualify for a discounted loan from the manufacturer, a dealer can still conveniently arrange for a loan from a bank or other financial institution. At most dealers, it typically takes less than 30 minutes to apply for and obtain a loan, and most offer some options for low credit ratings - in fact they make more money on these loans.

The lending arms of Ford, GM 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 keep in mind there is a downside to convenient dealer financing that is not directly through the manufacturer. Dealers obtain loans for their customers through local banks and finance companies and usually add 1-5% to the interest rate versus what they pay for the loan, keeping the difference as profit. Persuasive dealers working with uninformed or low-credit buyers can make more from financing a new car than 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, non-negotiable 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.

Credit unions generally have a charter to operate on a county-by-county or regional basis. You usually have to live, work or worship in their defined market area to join as a member, and some are open only to special groups, such as Navy Federal’s requirement that you be an active or retired member of the military. But if you qualify, it is usually quite easy to become a credit union member - often you can just walk in an open an account.

It is always a good idea to look at your financing options and available interest rates before you set foot in a dealership. At the very least you will have an idea of what the market interest rates are for your credit range, to ensure that the F&I staff at the dealership don’t mark up your loan to an exorbitant level. The best policy is to get pre-approved from a bank or credit union and come to the dealership armed with financing in hand. A salesperson who hears this will know you are a serious buyer and will give you their full attention - it is not their job to try and put you in a loan as well.

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 down 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 portfolio of securities, a passbook savings account, a retirement 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 your future financial security for a vehicle today. 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 die while your insurance-policy loan is outstanding, the proceeds to your family will be reduced by the loan amount.