Avoiding Auto Loans: 5 Alternative Financing Options

Auto loans are not the only way to you can purchase your car. Consider the following six alternatives to financing, one of them may be right for you.

Pay Cash

If you have access to cash, you can avoid the cost of a loan by paying cash. You may also want to consider borrowing the money from a family or friend to avoid the cost associated with auto loans.  If you borrow, you sign a simple note and pay them back.  Also, you can receive gifts of $13,000. from each parent without tax consequences, according to 2009 tax rules.

Use A Cash-Out Refinance

You may also be eligible for a cash-out refinance.  The cash-out can be used to buy your vehicle.  The drawback associated with this is that your payment terms will outlive your vehicle because mortgage loans are typically for 30 years.  To further avoid extra fees and costs, it is important to be diligent and pay a little extra toward the mortgage payment(the amount you would have paid in an auto loan) to get the principal down.

Consider A Home Equity Loan Or HELOC

Another option would be to use the equity in your home to get a second mortgage.  A home equity loan, where you get a lump sum of cash, or a home equity line of credit (or HELOC), where you draw out what you need would work. With the lump sum, you're paying on the total amount borrowed, in contrast to a HELOC loan where you only pay interest on the money you use. Interest rates on home equity loans and HELOC loans can be less than car loans, but they are adjustable - which means they can have the possibility of being higher than auto loan rates.  Your best bet would be to pay off the home equity or HELOC as fast as you can (no more than 5 years).

Buy Car With Credit Card

Although not as good of an option because of the high rates associated with credit cards, a platinum card with a strong credit line and a good rate can be beneficial.  Be sure you pay back each month in large sums (equal to those of the car loan) to pay off the balance in a reasonable time.

Cash Value Life Insurance

Permanent life insurance carries a death benefit and cash value (the potential for tax-deferred accumulation of money). Whole life, variable life, universal life and variable-universal life policies may be an option for you to borrow money against the cash value of your life insurance policy. You can also withdraw cash from some of these policies. There are tax implications involving early withdrawal, so consult with your tax advisor before considering this alternative to auto loans. Also the interest you'll pay on borrowing from your cash value won't count as interest paid on your income tax returns, but it will be paid back to your cash value account. You'd need to be diligent in quickly repaying the loan. The drawback of each of these options is that your money is no longer working for you and potentially provides less to your beneficiaries if you die before the loan is paid back or you pay more into your insurance policy.

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