One of the most popular loan products for the bank will sell is called a time-planned personal loan. These are flexible loan products that can be secured against major purchases, and adjusted to accommodate the incomes of the borrower at the expense of interest rate. The most popular application of this product is for the purpose of financing of a new vehicle. As discussed in the previous article hidden costs of dealership financing, dealer financing is a way for consumers to purchase and repay a short term loan for the car based on their current income.
However, because of the extremely short time period of such a loan, combined with a negative implications of going delinquent for even a single day, it is important to keep alternatives in mind throughout the dealership financing period. Specifically by combining dealership financing with a bank, a consumer is able to maximize the value they realize from their purchase, without being overly exposed to variable interest rates, short-term periods, or large upfront payment requirements.
When purchasing a vehicle, the consumer will usually be required to provide a modest down payment to be eligible for dealership financing. However, while the consumer will likely receive an extremely favorable interest rate, it will only be it for a short period of time. Upon completing this sort of arrangement, the consumer would be best served to visit their local bank branch and consult with a personal banker to receive a time-planned personal loan against the value of the vehicle itself.
The timing of the funding of the time-planned personal loan can coincide with the final week of the dealership financing agreement, so that funds are available to pay off the remaining principle on the dealership financing agreement itself. In doing so, the consumer effectively transfers their obligation for the vehicle loan from the dealership to the bank.
Once the loan is held by the bank, the terms of the agreement will change. Firstly, consumers will notice that there is a more reasonable interest rate that is being applied on a monthly basis. This trait will usually range from between the prime rate and prime plus 7%. This rate will fluctuate depending on the agreement established with the bank in the first place. If the consumer chooses to extend the period of the loan, they may be rewarded with a lower interest rate to facilitate cash flows.
Alternatively, if the consumer chooses to make more frequent payments, such as bi-weekly payments, they might find that they will pay down the principle amount of the loan more quickly, and therefore pay less overall interest. Lastly, by agreeing to an open loan type, the consumer will be able to pay off the loan in full in the event that they should be able to suddenly procure the funds necessary.
By transferring a dealership financing agreements to a financial institution, the consumer is empowered to maximize the value of the vehicle purchase by choosing a vehicle that suits them best. By focusing on value as opposed to cost, a consumer can potentially choose a vehicle that will last longer as an investment, or better suit their needs as a purchase. In the interests then of including the vehicle in a personal savings portfolio as a major investment, the consumer can work with a financial planner to ensure that the cash flow requirements of the loan, as well as the long-term feasibility of the purchase itself fit well within their means.