You’ve made the decision: it’s time to get a new car. Now you’ve got to decide on how to pay for it. You can either pay for the car in full, finance it, or lease it. Let’s assume that you don’t have a pile of cash set aside for that first option. This narrows your choices down to two: leasing and financing.
But how do you decide which is the right choice for you? And what about all that financial lingo dealers throw around, what does it all mean?
When you think of financing, just think of loans. By financing, you’re essentially spreading out the full asking price of the vehicle over a longer period of time. This is done by borrowing the money you need from a financial institution like a bank or credit union, commonly referred to as the lender.
If you’re financing a vehicle, you’ll be applying for credit. The total amount you will pay per month depends on multiple factors, including the price of the vehicle, the Annual Percentage Rate (APR), and the length of the loan terms (shorter loans typically have lower rates but higher monthly payments). Loan terms for vehicles are typically 36, 48, 60, or 72 months.
As you make monthly payments, the loan amount will drop to zero, and you will own the vehicle completely.
You apply for a loan for the vehicle, which an institution may or may not grant you based on your credit history.
Once you get credit approval, you pay a down-payment toward the loan — usually at least 20% of the cost of the vehicle, but you can put down whatever you can reasonably afford. The bigger the down-payment you make, the less you’ll need to pay per month.
After you make your payment and sign all the appropriate paperwork the car is yours! You’ll just have to make monthly payments to the lender until you’ve paid back the full amount you borrowed.
Don’t get discouraged! With so many factors going into financing a new vehicle you can still get an auto loan even with bad credit. Before you visit the dealership determine your financial situation and budget. Get a copy of your credit report so you know what to expect in terms of financing. Find a vehicle that fits in your budget and go to a reputable dealer.
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When you lease a vehicle, there are no loans involved. You establish lease terms based on how many months or miles you want to drive that vehicle (for example, 36 months or 36,000 miles at 12,000 miles per year). You make a down payment and pay a monthly fee, just as you would if you were financing. However, the down payment you make is lower when you lease, and your factory warranty covers the cost of typical maintenance issues that arise when you’re buying to own.
When your lease term is up, or you’ve reached your mileage cap, you must give the car back to the dealership and pay any excess depreciation or mileage fees (if any). The car also must look as close to what it did when you got it as possible, so accessories you added have to be removed, and permanent alteration or customization isn’t allowed. You may have the choice of buying the car at its residual value, but most people typically lease a different vehicle under a fresh term or buy a new or used vehicle.
It’s also good to keep in mind what you want to do with your vehicle. If you’re planning on hauling boats and trailers around on the weekends or consistently heading off the beaten path, it may be unwise to lease your vehicle. If you damage or scuff up a leased vehicle through regular use, you’ll need to either get it fixed before you turn it in or pay excess depreciation fees when you return it to the dealership, all for a car you don’t own.
And if you plan to put in some serious mileage in your vehicle through long-distance business travel or frequent road trips, you could easily blow past your lease’s pre-established mileage limit. Then, at the end of the lease, you’ll have to pay for every mile you’ve driven beyond that limit, which at 10 to 25 cents per mile can add up quickly!
If you’re living in a more suburban or rural town right now but expect to be moving to a crowded city in the next few years, you may decide that taking out a loan is not the right move financially. You’ll be locked into a longer-term payment plan, which may become a small burden. For example, you’ll have to regularly pay things like garage, permit and car insurance fees if you bring your vehicle into the city, all when it may be easier and more affordable overall to just use public transit. If you lease, you can drive the car that you need for the next 36 or 48 months and then cleanly return it before you move into the city.
On the other hand, if you see your living situation changing as you move away from the city or out of state, it may be wiser to finance. You won’t need to come back to return your car to the dealership you leased it from, and you’ll have a vehicle to drive for as many years as you need it. You can even sell your vehicle for some extra income, or give it to your children when they get their drivers’ licenses.
SUV or pickup truck? Sedan or coupe? Whether you’re looking for something with the best gas mileage or you need to get four kids to soccer practice, the first step in buying a new car is figuring out which vehicle is right for you.
If they can’t answer or you don’t understand, it’s probably not a wise investment or the right place for you to buy from. Trust your instincts; a reputable dealership values your questions and provides clear, honest answers, ensuring confidence in your purchase.
When you’re making a significant purchase like a car, it’s essential to remember that the dealership or salesperson should be there to support you. If you ever feel pressured or uncomfortable during the process, it’s a red flag and you should consider looking somewhere else.