Collector Car Financing

Funding the Dream: Is it worth it to take out a loan on a classic car?

You’ve been scouring ads for months, years maybe, looking for the perfect car. You know the one you want – the one that keeps you awake at night. You can smell the interior, you can hear the exhaust note, you can feel the acceleration – you can picture yourself cruising your favorite spots and arriving at local gatherings. It’s the dream. But it’s also an investment.

Over the past many years, special interest cars have proven to be investments with some of the fastest growing values. As such, it can be important to grab something while the value is still climbing. Unlike T-bills and bonds, you can enjoy, interact with, and drive these investments – not many people dream of buying a T-bill. But, sometimes, we need a little help financing the dream. Below are some of the most common questions and concerns covering the idea of taking out a loan to buy a classic car.

How can I finance a collector car?

Google the term, “Collector Car Financing,” and a bevy of financial institutions pop up, many of which have been around for decades. Each one of them offers a little something special to bridge that monetary gap between you and that special-interest car you’ve been dreaming of. The big question, of course, is which institution is right for you?

How can I pick a bank?

You need to do some soul searching. How much does the car cost? How much do you need to borrow? What’s the monthly payment going to be? How’s your credit? Do you have a number of credit card payments due? Do you rent or own? What are your total monthly expenses? All these and more will likely play into your securing a loan. Bottom line, like any other business, you need to figure out exactly what you can afford and what you need. Once you’ve figured that out, you can call on different lenders and find the bank that fits your needs. It’s like any other shopping, really – who are you comfortable doing business with?

What can I expect when I finance a collector car?

Collector car financing is a little different than regular car financing, but not by a whole lot. The basics are still the same, but you’ll notice sometimes the payments can be spread out by as much as 10 years, and the interest rates are normally a touch higher than average. So, it’s a give and take scenario. But, you’ll normally need a down payment, or an amount you’re investing in the car, most lenders seem to want to see 10 percent. You’ll need to be prepared for a new monthly responsibility, so make sure you can afford it. You’ll need to ensure yourself that not only can you afford the monthly payment, but that you’ll be okay paying for incidentals along the way – let’s face it, special interest cars are normally finicky.

What terms do I need?

This is very important. You need to figure this out on your own, before you start looking at banks. What can you afford per month? Remember, you don’t want the car to become your nightmare – you still want to be able to enjoy the car by going out and enjoying cars and coffee, car shows, date nights, and upgrades, maintenance, and repairs. If the loan is going to strap you, don’t do it yet. So, look at your monthly expenses, what are you spending versus bringing in? Is there enough leftover for a car loan? If yes, then consider what you can afford per month, and how long do you need to pay it down?

Some companies offer 10 or even 15 years to pay off a special interest car loan. Now, over time, you’re spending a fortune on interest – for some people, that’s not a big deal, they don’t care, they’re not in it for the money. But it eats away at your return when it comes time to sell the car, so keep that in mind – you can end up in the red and not even notice it. The shorter the term, the lower the interest rate, the better off you’re going to be. But a bird in the hand is a bird in the hand. Sometimes, you need to act quickly and need that lengthier term with smaller payments.

One great thing to look for in a loan is the ability to pay it off in full at any given point without penalty. So, ask about that, make sure you have the ability to pay it off without penalty or fee.

What do I ask the bank about a loan?

Write down your questions, and remember, the only stupid question is the one that never got asked. Ask everything. They want your business and you need to know every bit about your loan. The interest rate is the least of your worries. Ask about what kind of insurance you need to cover the car, and do they recommend any specific companies? Ask about terms – do you need a short term of just a couple of years, or would a lengthier term be better? Short terms usually call for higher monthly payments, so keep that in mind. Again, can you pay off the loan in a lump sum without penalty or fees? Is there a grace period in the event you are unable to pay the loan? Is there insurance for that? There are no dumb questions – before you call, ask some friends their questions so you build a nice arsenal and gain as much information as you can.

What credit score do you need for classic car financing?

Generally speaking, most institutions can get you signed up with a score of 600. Obviously, the better your credit, the better your options and usually the lower the percentage rate. Often times too, if you’re married, you can run your spouse’s credit; if they have a better score, you might get a better rate financing through their name instead of yours.

How can I prepare to take on a classic car loan?

Bottom line, don’t get in over your head. Be a good risk to yourself. While financial planners will tell you not to buy a special interest car on a loan, but rather save up the cash to buy it outright, special interest financing is there so that you can partake in owning a classic car. Here’s the flip side of the excellent advice of buying for cash – special interest cars usually go up in value over the years. So, the risk is good that at the end of the loan, your car will be worth more, or at least be at the break even point, than you’ve spent on it, including the interest. Classic cars are proving to be spectacular investments, which is why so many companies have popped up to finance them and insure them. It’s good business.

In general, it’s always good practice to make sure you are relatively debt free. Credit cards are paid down, you have no other auto loans, or maybe just one outstanding car loan for your daily driver, your rent or mortgage is under control, you have a fair amount of savings, you can prove a good income, and you can show you’re a good risk. Following these, and achieving a credit score of 700 or above, you’re going to have a much easier time securing a classic car loan. In general, when you can show you have very little overhead in your life, you’re not only going to prove to the bank that you’re a good risk to them, but that you are a good risk to yourself. Bottom line – can you afford it comfortably?

How much should I save for a down payment?

Obtaining a classic car loan, they will want you to have some money in the game. The amount varies and is dictated not only by the lender, but the risk you pose to them. That said, it’s a great idea to get your finances in order before you find that dream car. Make sure your credit cards are paid down or completely off, have a few thousand dollars in savings, make sure your income is steady, make sure your rent or mortgage has not been in default, and just in general make sure you don’t have a lot of overhead. Once you get there, start saving for the car in its own account. Leave your personal savings alone. The best loan is the smallest – so if you want a car that generally costs $20,000, and you’ve saved $15,000, you only need to borrow $5,000 to bridge the gap. That’s much easier to pay off than, say, $17,000 when you’ve only saved $3,000. And keep in mind – if you’ve already saved $15,000, you might give yourself additional time to save even more. If you can do this without a loan, you’re in better shape all around. But sometimes – the dream car falls right into your lap and you need act. Lenders are there to help.

Can I use a personal loan to buy a car?

Depends on the institution – the general rule of thumb is, yes, but don’t assume. Sometimes, a banker will have rules on what you can and cannot use the money for. Auto loans are usually secured by the car itself, the car becomes the collateral, which allows for a lower risk and a lower interest rate. On top of that, most institutions want the vehicle to be fully insured, so that in the event of a total loss, they get their money paid in full.

So while a personal loan might be attractive because it’s usually easier to obtain, the interest rates are usually higher, the terms are not as flexible or friendly, and in general, they pose a greater risk to the borrower.

Do I need to fully insure my car for a loan?

Normally, yes. Most, if not all, lenders will require you to have full coverage insurance on a special interest car. More than that, they will likely require you to have coverage from a company specializing in classic car insurance. This is because classic cars are a different animal than daily driver cars – their values normally hold or increase, and classic car insurance companies understand this. To a regular insurance company, a classic car is just an old car. It’s lost a lot of value, according to the Blue Book, and although you might pay $20,000 for it, the Blue Book might see it as only worth a couple thousand. Not a good place to be.

Fortunately, classic car insurance companies normally provide an agreed value policy, meaning you and the insurance company agree that the car is worth X-amount of dollars at the creation of the policy. In the event of a total loss, the company pays you that amount (extenuating circumstances notwithstanding, of course) and with it, you are able to pay off the loan.