Need a car but can’t pay cash and don’t have a generous rich uncle or friend? You have four choices: Borrow from the dealer or manufacturer’s finance company, borrow from a bank, lease, or borrow from a credit union. Each method may have advantages and disadvantages – but if you qualify, the way to go is usually with a credit union.
Structural advantages of credit unions
Credit unions are known for having lower fees and interest rates than banks or other finance companies. The advantage is in the credit union ownership structure. The owners of banks and most consumer finance companies are stockholders – not you, the customer. Those are for-profit businesses unlike credit unions, which are professionally managed and regulated not-for-profit cooperatives. This means every product or service banks and finance companies provide has only one real objective: to make money for the company shareholders, while not alienating customers.
Credit unions, on the other hand, are owned by their members. This enables profits to be fairly distributed among the credit union’s “owners” in the form of higher dividends, favorable fee structures, and lower interest rates on loans. Every dime that would have gone to Wall Street, in the case of a credit union car loan, instead stays with the credit union’s members. And you, as the borrower, get to keep a chunk of that money in the form of lower interest rates and fees.
Advantage to the consumer
With traditional banks, there can be an adversarial relationship between the bank and the customer. Banks serve stockholders by maximizing profits. Credit unions exist, however, to serve members. Think of it this way: If the credit union doesn’t serve member interests adequately, the membership can simply replace the management team until they find managers who are more responsive to member needs. It’s a simple, yet highly effective system guaranteed to benefit the membership of the institution!
At Radiant Credit Union, we have low auto loan rates with flexible terms. Quite often, we offer no payments for 90 days! When you get a Radiant pre-approved draft before you go shopping, you can focus primarily on the actual selling price, as opposed to having interest rates and terms cluttering up the calculations. A preapproved draft makes it easy to shop multiple dealers for the best deal, and you’ll know in advance exactly how much you want to spend and what your payments will be. In short, arranging for financing with your credit union before you begin shopping makes it much easier to compare offers from competing dealers by limiting the number of variables they can manipulate. Put another way, with prearranged financing from your credit union, you will be much closer to comparing apples to apples as you shop, instead of trying to decipher an apples to oranges comparison that gives dealers the home field advantage.
Another option is dealer financing. Their offered rates can be excellent on new cars (0% or 1% APR financing is tough to beat), but the picture isn’t as rosy for older cars, or for shoppers with less-than-stellar credit. Also, to get those ultralow rates you will normally have to give up any special discounts or cash incentives being offered by the manufacturer. If you do the math, you may find you get a better deal taking the cash incentives and financing with your credit union.
If you do go the dealer financing route, take a look at the fine print: You need a car loan with no prepayment penalty. This means you are free to pay off the loan balance at any time without any added fees or interest tacked on. The higher the interest rate, the more important this is. So called “front end loaded” loans, where you pay all of the interest up front before beginning to pay off the principal, have cost many shoppers thousands and thousands of dollars. Make sure you are signing up for a simple interest loan – the only kind of loan you’ll find offered at Radiant Credit Union.
The lease option
The final option, of course, is leasing rather than buying. A lease is essentially a contract to rent a vehicle for a period of time, agreeing to give the car back at the end of that contract (the lease). Lease payments tend to be lower than loan payments, because when a loan is paid, you keep the car! An actual loan buys the whole car, not just the depreciation incurred during the first few years it’s on the road. With a car loan, the pain of payments is over in a few years, but you can be driving that same car for 10 years or more, long after the payments ended! With a lease, though, your payments never end, and you never own the car. You just go from lease to lease to lease, like being on a merry-go-round that never stops. You do get to drive a new vehicle for the entire time, so there is that if the thought of perpetual payments doesn’t bother you. Just don’t drive it too many miles during the lease, or you’ll face a big lump sum bill at the end…but that’s a whole separate can of worms we won’t open here.
The bottom line
Do the math before you head to the dealerships and you are much more likely to come out of the purchase feeling good about your new vehicle…and yourself!
Radiant Credit Union’s low auto loan rates are set up to help you realize your dream of car ownership – and as an added bonus of financing through us, you’ll enjoy all the perks of credit union membership!
Your Turn: In the comments, please share the single most important tip you have to offer readers getting ready to finance an automobile.