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LOUSE FAIRSAVE – Options for car loans

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LOUSE FAIRSAVE – Options for car loans

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Last week’s article dealt with financing a new car through a bank or credit union. There are additional options that can be considered. For example, there is the loan through the car dealer or a finance company and there is the personal loan.
Car dealers have, in recent years, shown interest in entering this part of the financing market. They and other finance companies also offer prospective owners additional financing alternatives. Financing deals differ among car dealers and for different sizes of vehicles. 
In general, though, the car dealer offers an add-on approach to interest yet at typically lower rates than commercial banks. Further, there may be more negotiation flexibility with a car dealer than a commercial bank, particularly a bank that has to conform to international headquarters’ standards.  
A personal loan, in this case, means a loan made between friends or relatives on a formal or informal basis. A loan taken from a friend or relative may offer the ultimate in flexibility on interest rate and repayment period. 
However, this very flexibility may be the undoing of an otherwise caring relationship. Such personal loans are often fraught with misunderstandings between the parties about the future expectations of the timing and amount for interest payment and repayment. 
A major safeguard, if there is any, may be to discuss beforehand what those expectations are and set them out in a written document that both parties sign. Just bear in mind that any lender may approach you with such eagerness that you may be convinced that the lender has your best interest at heart. That may be so, yet they are almost always trying to get a good deal for themselves as well. So in choosing your lender, compare the costs before making a commitment. 
The best way to make this comparison is to have each lender quote you a monthly repayment for the same principal and the same repayment period. You can also ask your lender to describe how the interest payable is computed and tell you the average annual interest rate for the loan. 
Some vehicle loans come with other charges, too. For example, you may be asked to pay stamp duty, registration fees or commitment fees. All these are costs that should be factored into the cost of the loan. Do not let such charges come as a surprise after you have signed the loan agreement – ask up front. 
Other unusual ways of financing a vehicle include a loan that provides for some form of balloon payment, an overdraft facility or an operating lease approach. There are various situations in which each of these approaches may be the most economical. 
When the borrower expects a significant receipt of cash from some other source (for example a legacy or a bonus) in the short term that can be applied to the loan, then the first two options may be considered. 
An operating lease may be more suited to the purchase of a vehicle that will be used to support a business rather than a personal need. Hopefully, the business can financially support and justify the higher cost. After all, leasing a vehicle is equivalent to renting as even after three years of monthly payments, the lessor typically has no equity in the vehicle. 
Furthermore, lease costs in Barbados are relatively high. Finally, in the quest for a new vehicle, it is important to have priorities in order. 
First, it is not necessary that the vehicle be brand new, just be new to you and be what you appreciate. 
For most people, a new car means new debt. Just ensure that as you acquire the car of your dreams, you acquire manageable debt.
Louise Fairsave is a personal financial management counsellor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek other counsel about their specific circumstances.