Dealerships have finance departments dedicated to providing financing to consumers. Typically, dealerships will have relationships with 12 or more finance companies and will provide two types of financing options: simple interest loans and balloon financing.

Simple interest loans, where interest is charged on outstanding principal amounts. The quicker the loan is paid off, the less interest charged (since it is recomputed).

“Balloon financing” where the monthly payment is lower than a traditional simple interest loan, and a lump sum (or balloon payment) is due as the final payment. Balloon financing can be used to achieve a lower monthly, however, there can be more risk involved since the consumer may not be aware or recall that they will owe a large sum at the end of the loan. These types of loans should generally be avoided unless the consumer has the option at the end of the term to pay the lump sum or walk away. Some of these contracts give the consumer that right, other’s do not.

Interest on a car loan typically is not tax deductible - unless a home equity line is used (personal use), or the vehicle qualifies as a business expense under the Internal Revenue Code.