December 26, 2016 / J. Jones, Staff Writer

Auto loan debt is soaring among households worldwide. According to one study, in the United States alone, in 2015, the average household had $132,158 in credit card debt, and $27,865 of that was auto loan debt. Those numbers were even higher in 2016. Americans are paying higher monthly payments for longer amounts of time than ever before. Average monthly payments are at an all time high of $503, and the average term of an auto loan is also high, at 68 months.

In order to avoid long term debt and high payments, it’s a good idea to understand all possible options for car loans, specifically the sources of different loans and their associated benefits and detriments. When it comes to banks, credit unions, online lenders, and dealers and title loans, what’s the best option? Read on to find out more.

Banks

Almost everyone does business anyway with a brick-and-mortar bank, and they offer reasonably competitive interest rates on car loans, so most people think of a bank first when they’re seeking a car loan.

The experience here can vary widely, as different banks calculate risk in different ways. Generally, banks tend to cater to people with good credit ratings and have conservative, specific policies. If you’re privacy-minded, using the bank you already do business at isn’t a bad idea. If you already use a particular bank to manage your finances, they’ll already be aware of your financial status (which may or may not be a good thing), which lets you limit the number of entities that have access to your personal information and data.

Banks also usually have personal service, letting you sit down and talk out your options with a real person.

Credit Unions

In some ways, taking out a loan from a credit union is similar to taking out a loan from a bank. Many prefer to seek loans from credit unions, and in fact might do all their financial business with a credit union. You’ll need to be a member of a credit union in order to obtain a loan from one. Credit unions are owned by their members, and do their best to operate with the best interests of members in mind. Banks, by contrast, are seeking to make a profit from client fees and interest rates.

If you’re a credit union member, your credit union will try to offer you a loan at a reasonable rate. Since credit unions are nonprofit organizations, they don’t generally charge hidden fees and have low operating costs in comparison to many banks. You’re also likely to get personal assistance and all your questions answered, but it might not be as convenient or fast as other options.

Online Lenders

Online lending is convenient and fast, and can offer competitive rates. However, you won’t get personal service or your questions answered, and as with many ventures online, scams can be prevalent, and unless you’re a savvy online consumer, it might be difficult to tell whether you’re getting a good deal or getting swindled. Finding these is as simple as doing a search for “online auto loans.” Once you find one, it’s a good idea to check it’s standing with the Better Business Bureau.

Dealers

It might seem like a no-brainer to go through your dealer when you’re financing for a new car, since they’re the one you’ll be purchasing from. A dealer doesn’t actually provide a loan, however. Instead, they’ll help you finance for the purchase, usually for a fee that can vary drastically and might change over time. You might pay 0% for the first few years (for example), but a much higher rate down the road. They’re able to offer this due to previously established relationships with lenders such as banks and credit unions.

This can be fast, convenient, and easy, and, depending on the dealer, you may be able to negotiate more than with other options, but interest rates can be high. In fact, many dealers make more of a profit on auto financing than they do on auto sales! It’s a good idea to make sure you shop around and receive estimates from other options before going right to the dealer for financing.

Home equity loan

This allows you to tie your auto loan to your home loan. You can often get competitive rates this way, and can deduct some interest from your taxes, but it is wise to understand two major drawbacks: you are financing a car for (typically) 25 years, so you’ll still be paying for it long after you’ve sold it, and you are pledging your house as collateral.

Family & friends

Taking a car loan from family and friends can be hugely helpful, as you’re able to work together to determine what you feel to be a fair rate and payback schedule. You might even be able to avoid paying interest! However, tying auto finances to personal relationships can be volatile and risky, and if things don’t go well, you might place unnecessary strain on the relationship and lose a friend.

Title Loans

In a title loan situation, you’ll use your car as collateral against debt. These are appealing to those with bad credit who might have been turned down for a loan by their bank or credit union. Interest rates tend to be extremely high with title loans, often as high as 300-650%. These loans can be appealing when one is short on cash, but the amount owed skyrockets quickly, and you’ll also be at risk of losing your car if you can’t pay the loan back. These are also called “pink slip” loans. If you’re considering this option, it’s a good idea to seek out some low-cost credit counseling first, and see if you might be eligible for another option.

When it comes to auto finance, it’s best to make sure you understand every car loan option available, so you can balance risk and the total amount you’ll pay back over time, including interest. When you’re about to take out an auto loan, shop around and get estimates from different loan providers. There’s no right or wrong answer, but knowing your options will help you make a savvy choice and avoid the high payments and long-term debt that are all too common among Americans today.

J Jones, Staff Writer