Which Is Better: Buying a Car at a High Interest Rate or Renting It?
Is it worth settling for a high interest rate on a car loan or are there better financing options? Here’s what we’re watching this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week’s question from an anonymous source:
I have a low credit rating of 600 and my old car had an accident. I need a new trip for me. The lowest interest rate I have applied for is 13.74 percent! I asked around several family members, and no one could sign a joint agreement. Any tips for lowering your rate? Or will I take it and hope to refinance in a few years? Or will I try to rent? Or something completely different? I will receive $ 1200 in compensation for the total loss. Live in MD (if it matters).
My stats: split (divorce started in the fall), two boys, 16 and 13 (so looking at higher auto insurance and college soon), $ 50,000 income.
This is what individual experts usually say about an issue that affects each person differently: if you need personalized advice, you should see a financial planner.
There are many financing options
According to Greg McBride, chief financial analyst at Bankrate , the 13-plus percent annual interest rate is certainly not ideal, but it also doesn’t seem completely unacceptable given your credit rating. But you may not only be looking for financing options from your dealer – a bank, credit union, or online lender may offer a lower interest rate.
“Given the uncertainty of your post-divorce financial situation, in particular your loan and budget, there is no guarantee that you will be able to refinance later at a better rate,” McBride says. “I would caution against taking out a loan with a high interest rate and just assume that you can get out of it in a year or two – it is possible, but for now you will be stuck with 13.74%.”
If you go to the dealer, Matt Jones, senior editor of consumer recommendation at Edmunds, says you have several different options that could potentially help you get a better deal. You can buy a new car at a special sale (after all, the summer sales are about to start) or a car to be swapped out for a newer model. Dealers will offer you a better deal so they can move inventory.
“In some cases, buying a new car can get you a lower monthly fee than a used car when you factor in all the discounts and perks,” says Jones. “And because interest rates on new cars are usually lower than on used cars, sometimes the best money is spent on buying new ones.”
He gives an example like this:
A $ 17,000 used car loan at 13.75 percent gives you a payout of $ 394. For a $ 20,000 new car loan at seven percent, the payoff is $ 397. It is very possible to buy a great new car for $ 20,000, and the average annual interest rate for your [credit] range is around seven percent.
You can also rent a car at the lowest initial cost of all the options listed. “Since the car will be brand new, there is no need to worry about maintenance costs because you will be under warranty,” says Jones.
However, you usually need a higher credit rating to be eligible for a rental. This is why McBride and Jones say your best option is to use that $ 1200 down payment for a cheaper used car . You can turn to peer-to-peer lending to get a loan and your down payment will help mitigate the high interest rate charged. Plus, you can probably refinance this way.
“Buy the cheapest used car that works and feels comfortable,” says Jones. “The cheaper the car, the lower the interest rates. And if you pay for the car quickly, you will also lower your overall interest costs. ”
Being aware of your payments will also likely increase your credit score, which means you will get a higher rate down the road if you need to buy a car again. Good luck!