What Are Alternatives to Traditional Car Loans?

What is a Traditional Car Loan?

Auto loans earmark the money you are borrowing from the lender specifically for purchasing a new or used vehicle. You will pay off the loan with interest in monthly installments over the length of the loan term. The most common type of car loan is a secured auto loan, where the vehicle serves as collateral for the loan, and if you default on the loan, the lender has the right to repossess the car.  

There are a few variables and other factors that affect traditional car loans, which could potentially make non-traditional car loan alternatives more attractive:

• Credit score. Borrowers with low credit scores are subject to higher APRs and other rates.
• Principal amount. This is the amount you need to borrow after down payments and trade-ins; more expensive cars take longer to pay back, which means more spent on interest. 
• Down payment. If you don’t provide a large enough down payment, you’ll have to borrow more to afford the car. 
• Trade-in. Some dealerships allow you to trade in your old car as a form of down payment, reducing the principal amount.
• Taxes and fees. You will also need to secure funds for any additional taxes or fees, depending on the state laws and dealership, in addition to the principal and loan interest.
• Loan-to-value ratio (LTV). Since the car is the collateral with traditional auto loans, more valuable cars have a higher LTV, which increases loan rates.
• Loan approval. Like most loans, auto lenders need to vet and approve your ability to borrow; if you can’t get approved by a lender, you’ll need to find alternative ways to finance a car.

What Are Alternatives to Traditional Car Loans?

Typically, auto loans are administered by a financial institution or car dealership’s financing division. If you have a less-than-ideal credit score, can’t afford much of a down payment right now, or just like to go against the expected, alternative ways to finance a car might present a better option. 

Here, in no particular order, are four alternative ways to finance a car. Take a look at how they work and their pros and cons so you can determine which of these non-traditional car loan alternatives may be the best approach for you. 

1. Use a Personal Loan to Finance a Car

Personal loans are generally used to pay for a range of personal matters such as home renovations and repairs, big-ticket events like weddings or vacations, emergencies, or debt consolidation. 

The advantage of personal loans is convenience and, to some extent, flexibility. You can receive a large sum of money relatively quickly, sometimes without collateral. While some lenders restrict what the money is used for, you will generally have more freedom with how you spend it. 

However, the disadvantage of personal loans lies in the fine print. For starters, it’s not always easy to qualify for a personal loan; those with poor credit scores may face higher interest rates or even be denied in the first place. Personal loans can also have more fees and penalties than other loans. 

Consider using personal loans to buy a car if:

• You need a car quickly
• You have a good credit score
• You have other major expenses besides the car
• You’re diligent about monthly payments

2. Lease a Car

Leasing a car is similar to leasing a house or apartment in that you pay regular installments to use the vehicle but do not own it. Car leasing is essentially a long-term rental where you’ll likely have the option to purchase the car at the end of the lease. 

Leasing a car is ideal for people who enjoy the latest models or technologies.  Another advantage of leasing a car is the cost; the monthly payments for a car lease are generally less than an auto loan. Car leasing also gives you better coverage for maintenance and repairs, as new, leased cars are usually still under warranty. 

The disadvantages, however, revolve around not owning the car. Despite making years of payments, you must turn the car in when the agreement ends or pay additional money to purchase it outright. 

Typically, your lease agreement will come with a mileage cap, where you agree not to drive more than the specified amount of miles. This makes leasing a potentially restrictive choice for people who use their cars extensively. You may be subject to steep penalties if you exceed a mileage cap and/or put excessive wear on the vehicle. 

All together, leasing a car makes sense if:

• You enjoy using the latest car models
• You drive a predictable distance regularly, with few surprise trips
• You don’t need the car permanently

3. Try Peer-to-Peer Lending (P2P)

Peer-to-peer lending (also known as P2P lending, crowd lending, or social lending) is a relatively new form of loan that utilizes the internet and social media to connect borrowers with individual lenders rather than financial institutions. Different P2P lending websites and apps, such as Kiva or Prosper, set their own terms, rates, and qualifications. 

Many people assume P2P lending is dangerous or risky because it’s unregulated. While there is some truth to that, the lenders accept most of the risk. 

The advantage of P2P lending, especially for auto loans, is that lenders can overlook poor credit scores. Although qualifications vary by platform and the lenders themselves, people with poor credit scores or minimal collateral can potentially still take out the loans they need. P2P lending also shares some benefits of personal loans, such as a quick processing time and flexibility in spending money. 

The disadvantage is that you will tend to pay more overall to compensate for the lender assuming more risk. P2P loans usually have a hefty origination fee paid at the start of the loan, on top of conventionally higher interest rates than other loans.  

You might want to consider P2P lending as a car loan alternative if:

• You can’t qualify for other auto loans
• You have a poor credit score and/or minimal collateral
• You need to buy the car quickly

4. Join a Subscription Service

Car subscription services are similar to leasing a vehicle. With car subscription services, you’re still “renting” the car but usually get a shorter duration period and more flexible terms than through leasing. This allows you to get new vehicles more frequently. 

The main advantage of car subscription services is their simplicity. Users typically pay a monthly subscription fee that covers everything from registration to insurance. Additionally, there’s less commitment than leasing; car subscription services are easier to cancel and offer shorter rental periods. 

The disadvantages of car subscription services — aside from not owning the car — are the price and availability. While the cost of a car subscription service may seem low initially, depending on which service you use and which features you sign up for, it can get pretty expensive. 

As for availability, many car manufacturers have ended their subscription services, leaving mostly rental car companies and third-party apps. Even so, some states, like California, have strict laws for car dealerships that limit subscription services. 

All in all, consider subscription services if:

• They are available for your area and preferred models
• You want more flexibility in your contract than car leasing
• You enjoy driving new cars frequently

Credit Union Car Loans

Maybe you feel more comfortable taking out an auto loan from a financial institution, but you still want those lower rates from non-traditional car loan alternatives. In that case, consider taking out a car loan from a credit union. 

Credit unions function just like traditional banks but with one major difference: Credit unions are run by the members, not a board of executives focused on profits. As a result, not–for–profit credit unions tend to lower interest rates and fees than traditional banks, making them a more appealing choice for car loans.

Further Resources on Car Loan Alternatives

Have more questions about alternative ways to finance a car? Take a look at these additional resources: 

• Know your options. Take a look at this report on alternatives to buying a vehicle without traditional financing, like loans or leases. 
• Be prepared. Here are some top questions to ask yourself as you prepare for car-buying. 
• Don’t overpay. Learn the signs to avoid overpaying for your car loan.

A Community-Focused Car Loan Alternative 

Equipped with your newfound knowledge of non-traditional car loan alternatives, you can now explore a broader range of financing choices for your next vehicle. 

Don’t forget to consider the OG financing alternative in your search: Your local credit union! Use our Credit Union Locator Tool to find the community-based credit union closest to you and see all the advantages of credit union car loans for yourself.

Did You Know?

Credit unions are known for flexible car loan financing options at excellent rates. Unlike banks with incentives to maximize profits, member-run, not-for-profit credit unions can offer lower interest rates and fees on financing services like auto loans.