Classic Car Loan Alternatives
When looking to purchase your dream car, a classic car loan is very often the best choice. Specialty lenders are familiar with the classic and collector car market, and can offer you attractive interest rates and relatively long terms, which lower your monthly payments. However, there are other ways to manage your classic car financing or exotic car financing.
You may be able to go through your local bank for a normal car loan, but most banks will treat a classic car the same as a typical used car. You may find a loan officer that is familiar with these types of loans, but most banks are not willing to “step out of the box” when it comes to a classic car loan. The loan term will likely be short, and the interest rate relatively high. Not a good choice! An unsecured personal loan is another possibility, but interest rates are typically high, and it may be difficult to borrow as much money as you need this way.
Credit cards are very convenient, and many offer very low introductory rates, but these rates are temporary and will become quite costly once the introductory period expires. They can be useful in the short term, though, while you make other arrangements for your classic car loan.
A home equity loan or line of credit is yet another alternative. However, many of these loans do not have fixed interest rates, and if the prime rate starts climbing, so will the interest rate you are paying on the car. It also may not make much sense to put your house up as collateral for a car!
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You may also be able to borrow money from your 401K plan. The interest rate is usually very reasonable, and hey, its your money anyway, right? Most financial advisers agree that this is a bad idea, though. The money you borrow will not be able to earn interest and dividends, and it could put a big dent in your retirement. You normally will only have five years to pay back the loan, or else it will be counted as an early distribution and you will have to pay a 10% penalty. Also not a good idea!
Did you know that some companies offer leasing as a collector car financing option? The lease payments will likely be low in comparison to many other forms of payment, but leasing can be very complicated. Depending on how the lease is structured, you may not gain anything from the car’s appreciation. Make sure you completely understand all the terms of the lease, and all the “What Ifs” that come along with it.
The most common alternative, of course, is to pay cash for the car. This is certainly the safest route to go, but in some cases it may not be the most financially savvy thing to do. If the cash is coming out of your retirement fund, emergency cash fund (you DO have one of those, don’t you? 3-6 months of expenses in a liquid account…), or other investments, then you have to consider the “opportunity cost” of using cash. In other words, “What could this money be earning elsewhere if it wasn’t tied up in the car?”. You also have to remember that the car will at the very least need to be insured, stored inside, and maintained. If you drive the car, there will likely be repair costs also. Let’s say you are purchasing a $100,000 car, and you have that much cash available. It may make sense to put $30.000 down, borrow $70,000 using a classic car loan, and then invest the $70,000 cash you have left over elsewhere. You will still reap the benefits of the appreciation on your $100,000 classic car, while your other $70,000 could possibly be earning more than the interest you are paying on your classic car loan.
The bottom line is that classic car loans can save you money when compared to traditional car loans or other types of financing, and may even be a wise choice compared to paying cash for a classic car. For a listing of lenders that specialize in classic car loans, visit my Classic Car Financing Directory.
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