Classic cars are expensive. The ones that look actually good and run well cost even more. Not every has tens of thousands of dollars in their mattress for their classic, but there is financing available for those who need their classic car. Let us dive into the various financing options available as well as the pros and cons of each. There is a list of some of the companies that provide financing for collector cars at the end of the article.

Personal loan:

Borrowing money from your friends/family is one way to get financing for a classic car. With the bank paying close to 0% on savings rates, a friend might be happy to earn 3-4% on their money.

If you do go this route, you may want to get an attorney to write up terms of the loan including payment schedule, rate, if pre-payment is allowed, any collateral in place, and conditions that must be met to keep the loan in good standing. Your friend may also want to know the course of action in case you default on the loan or sell the car.

Nothing ruins a lifelong friendship or family bond over money, so be careful going this route from a personal relationship perspective, but from a lending aspect, and this is a great way to get into that classic car you have always wanted.

Home Equity Loans:

With the prime rate hovering around 5% and “dead” equity sitting in your house, tapping the equity in your house is a fast and easy way to pick up that classic car.

The nice thing about these loans is that you have access to the money as soon as the line of credit is established. Since these lines of credit usually have no upfront costs and you can use the funds as soon as you are approved. You only pay interest on the money you borrow and not on the unused credit. If you want to buy a rust bucket that needs a ton of work, a one-of-a-kind exotic, or a daily-driver, Big Brother is not going to require an appraisal, inspection or other due diligence.

The interest on these loans is often tax deductible, which will bring your actual interest rate down between 10-39.6% (depending on your top tax bracket).

These loans are often structured as interest only for five or ten years with monthly payments. After the initial term, they usually convert to a fully amortized loan for the next ten or twenty years. However, in many cases, you can renegotiate terms of the payment with the bank to go back to interest only payments or find another bank to issue you a new loan to replace the current one.

For example, if you borrow $50,000 at a rate of prime (currently 4.25%), your monthly payment would be $177 a month ($50,000 times 4.25% divided by 12 months = $177). This payment is interest only. Any additional principal payment you make will reduce your loan balance and payment in subsequent months. If a month after borrow the money, Uncle Larry decides to gift you $10,000 that you use to pay down the loan. The next month’s payment would be $142 a month ($50,000 times 4.25% divided by 12 months = $142).

The trade off to these loans is that you are putting your house on the line in return for low interest rates. If your $125,000 mint condition E-type is stolen and you forgot to add theft insurance or if the classic car market heads south, you still owe the payments. If you lose interest in the car and it sits in your garage unused for three years, the bank still wants its money.

The interest rate on these loans is often variable, meaning it fluctuates as the Fed changes interest rates. The Fed has just started moving interest rates up, and generally, when the Fed does start to move them, it keeps moving them in the same direction for some time.

All of your major banks offer home equity loans. Shop around for the best terms and conditions.

Local Bank Loan:

If you have an established relationship with a neighborhood bank, you may be able to borrow money from them for your car. This type of loan may require an inspection, appraisal, and seller “approval” (meaning must be a licensed dealer and not a private party).

With these types of loans, the interest rates are often twice what typical home mortgage rate cost. There may also fees to set up the loan. Often banks do not care if the car is five years old or thirty-five years old, they look at these as used cars and they structure the loan like a used car loan with payments of thirty-six or forty-eight months with a fully amortizing loan. For example, if you borrow $50,000 at a rate of 8% over forty-eight months, your monthly payment would be $1220 a month. At the end of the four years, your loan would be paid off. You can use this calculator to figure out your payments based on loan amount, rate, and term. http://www.calculator.net/payment-calculator.html?ctype=fixterm&cloanamount=50000&cloanterm=4&cmonthlypay=1000&cinterestrate=8&printit=0

As a general statement, traditional bank loans are not the cheapest way to financing the purchase of a classic car.

Specialized Classic Car Loans:

Do not expect to walk down Main Street and find these lenders in the same strip mall as the Jimmy Johns and Starbucks. These are specialty lenders focusing exclusively on exotic loans ranging from airplanes, boats, weddings, and even horses.

The interest rates on these types of loans are inline to several points higher than home mortgage rates. The fees range from zero to a small percentage of the loan amount. The loans range in term from two to ten years and are fully amoritizing.

The interest rate of these loans is determined based on multiple factors including an inspection/appraisal of the car to determine its condition, the collectability of the car, if the seller is a private party, dealer, or auction, the term of the loan and the credit of the borrower. The biggest drivers of your rate are your credit score and history. No company is going to give you the best terms if your credit score is below 700.

When you call one of these lenders, they will not question your desire to buy a 1934 Pierce Arrow. These are in the business of writing of writing these loans. These loans can be secured (some type of collateral-usually the vehicle being purchased) is required or unsecured (your other assets such as bank accounts are on the line if you decide to stop making payments). Rates for each of these cases vary based on your credit score, the loan amount (often it is cheaper to borrow more money than less because the paper work for each loan is identical), your net worth, and income.

You need to put a down payment of 10-20% of the total purchase price. Generally the more you put down will result in a lower financing cost.

Specialized Classic Car Leasing:

Do not confuse leasing a classic car with leasing a brand new Porsche 911 from the neighborhood dealer. Classic car leasing is much different new car leasing.

A new car lease, known as a closed end lease, usually has a high residual value (the agreed value of what the car will be worth when the lease terminates) and a term of usually thirty-six months. Closed end leases are reported to an individual’s credit report and have limits on mileage allowed on the car over the term of the lease. When this lease ends, the lessee returns the car to the dealer without any further obligation. Theses leases are written to help new car dealers sell more cars, make money on the financing component, and entice customers to return to the dealership to get the new model when their current lease ends.

A classic car lease is structured as an open-end lease. These leases have terms ranging from twelve to eighty-four months, a negotiable residual value, and a variable down payment. These leases are not reported on an individual’s credit report and there are no mileage restrictions in place. At the end of the lease term, a balloon payment is due. The title of the car is transferred to the lessee and he retains ownership of the car.

With a new car lease, the car comes with a warranty that often extends beyond the lease term allowing for minimal out-of-pocket maintenance. With classic cars having their original new car, warranties long expired when the new owner takes out financing, require their owners to cover all repairs and maintenance on their own dime.

In cases of both types of leases, the lessee is required to purchase their own insurance on the car. Taxes on the car are spread out over the term of the loan with a portion of the tax bill allocated to each monthly payment.

To qualify for the best terms of an open-end lease, the buyer must have excellent credit, sufficient income, a high down payment (you can put down 10%, but more money down provides more security to the lessor), an appraisal of the car may be required, and the lender may require a detailed financial statement of the lessee. Typically, a lease structured with a high down payment, shorter term, and low residual value will result in a lower financing cost compared to a lease with a low down payment, longer term, and high residual value.

The primary users of these classic car leases are business owners who make the lease payments as a business expense from pre-tax income. Typically, the car is registered and insured in the individual’s name, but the payments are made from the business. This allows the business owner to use the car for business purposes and effectively reduce the cost of financing the car.

A lease payment is based on the money factor of the loan. Money factor is expressed as a number such as .0025 or simply as “2.5”. To roughly translate the money factor into a more recognizable number, multiply the money factor times 2400. In this case, .0025 x 2400 = 6%, so a lease with a money factor of 2.5 roughly equates to a financing charge of 6%. Calculating the actual payment is a bit beyond the scope of this article, but realize that you are paying an interest and principal component in each payment. Make sure you ask for a residual value quote for each month of your lease so you know what you are required to pay out if you terminate your lease early.

Unlike closed end leases, these leases can be terminated by the lessee at any point. The previously agreed on residual value is due and the title is delivered to the owner. This is beneficial to a classic car dealer because they can sell, trade or payoff the car at any time. One thing to note about terminating the lease early is that the residual value may be higher than the original loan amount because these leases are structured with the fees/interest paid in the initial part of the loan similar to an amortizing schedule on a home mortgage.

Although there are stories of people using classic car leases to leverage up their car purchases and profit, keep in mind that you are still buying a vintage vehicle that has used car problems. https://www.forbes.com/2005/08/17/ferrari-exoticleasing-luxurycars-cz_jf_0817feat_ls.html#628704ced684

  • *None of the information in this article is to be considered professional tax or legal advice. Consult with an attorney and/or accountant before financing a classic car. The lenders listed in this article are listed for reference only and are not endorsed by Sharp Classics.

Companies that offer classic car loans and or leasing:

Exotic Car Loans http://exoticcarloans.com/ 866-915-1888
J.J. Best Banc & Co https://www.jjbest.com/ 800-USA-1965
Premier Financial https://www.premierfinancialservices.com/ 877-973-973-7700
Putnam Leasing http://www.putnamleasing.com/ 888-995-5800
Woodside https://www.woodsidecredit.com/ 800-717-5180
Light Stream https://www.lightstream.com/  
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