How to finance a classic car

Saving up for the car of your dreams may seem like a daunting task. No matter how much you keep putting away those pennies, the value of the classic car you’re after keeps going up. Sometimes it seems as if the car of your dreams is also the car of everyone else’s dreams.

But there’s a little secret that I should tell you about. Lots of people finance classic cars. It’s much more common than you might think. In fact many savvy collectors and investors finance their classic cars. Speaking to your accountant and having a well thought out financial plan (and fairly good credit) may not only allow you to achieve ownership of that classic, it might even offer financial advantages. Consider too that if you combine the money that you’ve already saved with financing that might be available, you are probably closer to ownership than you think.

Regular banks and other lending institutions don’t understand the concept of providing a loan for a car that is likely decades old. They don’t understand the risks, and they don’t understand the potential rewards. So most simply don’t do it. 

Two of the larger companies that finance classic cars are J.J. Best Banc & Company and Woodside Credit, and there are others as well.

They all work in a similar manner. Most classic car purchases are looked at on an individual basis with the type of car and the owners credit rating determining the interest rate and the down payment. Expect down payments ranging from 10% to 30% with interest rates ranging from 5% to 10%. In most cases you can also finance the sales tax into the loan, and with some finance companies you can even build the cost of a warranty into the loan. Some collectors that I know finance their classic cars for this reason alone. The length of the loan is generally in the ten to twelve year range and there are usually no pre-payment penalties.

Speculators are frowned upon, and I don’t know of any companies that will finance a restoration project. Much like a classic car insurance company, these finance companies minimize their risk by financing people who want to own and enjoy the car, not speculate on its appreciation in value. Likewise, they are aware that it is virtually impossible to restore a collector car without quickly being “under-water.” Since the car is their collateral, a car that is “under-water” is not a particularly attractive piece of collateral.

Another way that they discourage people from using this financing to speculate is by requiring that the car be titled and insured in the owners name. These are fairly significant expenses, and it ensures that the car will not be parked in a warehouse somewhere for a few years with an “open title.”

But for the hobbyist who is trying to purchase a classic car that they plan on owning for an extended period, the classic car loan could be a smart move.

Distinct from financing the purchase of a classic car is the alternative of leasing one. Once again, a call to your accountant is in order to determine the specific financial advantages that might apply to you. The way that it works is that you and the leasing company (mostly the leasing company) determine what the car will be worth at the end of the lease. This is called the residual value. That value will always be there, so you are borrowing the difference between the cost of the car and the residual value. This amount that you are borrowing is broken up into monthly payments that are spread out over the term of the lease.

When the lease is over the leasing company gets the car back and sells it for the residual value. Or, if you think the car is worth more than the residual value, you can buy it for the residual value and sell it for more. The leasing company doesn’t care. Either way, they get their money.

Leasing has an advantage that financing does not. You don’t own the car. If the market takes a downturn, it has no effect on you. If you want to drive a different classic car every year, or two years, or three years, this is easily achieved. Companies such as Premier Financial Services offer these programs.

There are many other ways to buy a classic car without writing a check, but they involve you putting up one form of collateral or another. If you own stock, many financial institutions will take this as collateral against a loan. But if the value of the stock goes down, expect a call from your lender because their collateral has just diminished in value.

Home equity loans, personal loans, and credit lines are ways that I often see buyers use to finance the purchase of a collector car. All have their advantages and disadvantages, but a call to your accountant or financial advisor would certainly be in order.

Of course, you could buy a classic car the old-fashioned way. Save up for it, pay for it, and own it. Nah, why do that?