Want a New Car? Learn How to Finance It

Lots of people love buying new cars, relishing the freshness, the style, the newest options, the prestige, even the smell. Others hate the whole process, feeling out of their element when they haggle and dreading the cost.

Like it or not, every car owner has to run the car-buying gauntlet eventually. One of the biggest issues: how to pay for the new vehicle.

Although everyone keeps talking about today’s “low interest-rate environment,” car loans are nothing to brag about. Average rates range from about 6.5 to more than 7 percent, depending on the length of the loan term, according to the BankingMyWay.com survey.

You might beat the averages by looking around with the shopping tool. Bank of America (Stock Quote: BAC), for instance, has a 36-month new-car loan for 4.54 percent, covering 90 percent of the purchase price, while National City Bank (Stock Quote: PNC) has one at 4.83 percent, for 100 percent of the price. Many credit unions are offering four-year deals at less than 5 percent. (Use the Auto Loan Calculator to figure payments.)

Before taking out a new-car loan, consider three other approaches:

Liquidating assets. Basically, that means tapping savings or selling investments, like stocks, bonds or mutual funds. That way, you can avoid interest costs altogether. Avoiding a 7 percent car loan is like earning 7 percent on an investment. But there’s a price to pay, nonetheless, in the form of lost earnings on the investment or savings.

The choice comes down to comparing the interest rate on the best auto loan you can find with the expected return on the investment or savings. If you have a stock fund you expect to pay 10 percent a year, keep your money there even if it means taking out a car loan at 7 percent.

Keep in mind, though, that any investment that might return more than 7 percent a year will carry some risk of loss. By comparison, the savings you realize by forgoing a car loan is like a guaranteed return equal to the loan rate.

Home equity. If you own a home that is worth more than you owe on it, you could use a home equity loan to pay for your new vehicle. For most people, interest paid on a home equity loan is tax deductible.