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When deciding how to finance your new car, you will first need to decide whether or not to buy or lease it. There are definite advantages and disadvantages to both. Let's take a closer look.
Leasing your new car
About one-third of all new cars are leased. Here are a few of the reasons why so many consumers opt to go this route: - Leasing typically means you will be making lower monthly payments than if you are buying a car.
- What's more, you usually don't have to put down as large a down payment or have a car to trade in like car buyers do. If you are someone who likes to have a new car every few years, leasing may be a good choice for you.
- Cars are what are known as "depreciating assets." That is, they tend to lose, rather than gain, value over time. So unless you intend to keep the car over a long period of time, you are not likely to get your money back when it comes time to sell it, and even then, only if it becomes a classic!
With a lease, you never actually pay for the full value of the car. Rather, you finance the portion you use while you are making payments, and the leasing company retains ownership of the car all the while, reclaiming the vehicle once your term is over. Here is how it works:- With a lease, you typically make a down payment and borrow the rest.
- Payments are based on three factors: the value of the car when you lease it, its value at the end of lease, and the interest rate at the time you initiate the lease.
- In addition, you usually will have to make a refundable security deposit when the lease begins for roughly one month's payment.
- If you decide to terminate your lease early, you will be responsible for paying the remainder of the term you agreed to as well as any termination fees you are responsible for. Keep in mind that a typical lease lasts anywhere from two to four years.
As attractive as leasing a car can be for the right person, there are pitfalls too. Here are few tips that will help you avoid the big ones:- Be sure you understand the terms thoroughly. The dealers will try to focus on a low monthly rate to overshadow the costs of the rest of the agreement. In an effort to curtail this type of behavior, the federal government requires that the dealers provide you with a document that details the terms. If the dealer refuses to comply, just walk away and find one who will.
- Return the car in the best shape possible. It pays to take good care of your leased vehicle. You will be charged for any dings, dents and abnormal wear and tear to the car once your lease term runs out. Keep in mind, too, that there are mileage restrictions attached to most auto lease agreements. They typically range from about 10,000 to 15,000 miles per year. If you go over the allotted mileage, you will be charged 10 to 15 cents for each mile above the limit when you turn in the car.
Buying your new car
If you opt to buy your car, you can either pay for it outright or finance it with a loan.
Whichever route you choose, the car is yours, so you have no mileage or use restrictions and at the end of the term of your payments, you can do with it what you please.
Financing your car with an auto loan
Like leasing, buying a car with an auto loan also involves a down payment, monthly loan payments, and other initial costs like taxes and registration fees. In this case though, your monthly payments are usually higher than lease payments would be because you are paying for the entire cost of the vehicle and not just the portion you use over the term of a lease.
HerTip: As with all loans, you will find that rates on auto loans differ quite a bit from lender to lender, so be sure to shop around to get the best rate.
Trade-Ins
Many buyers will trade in their old car to pay for a portion of the new one. If you are considering this approach, just be sure to have its value assessed first by a mechanic you trust. You can also look for approximate values online to get a feel for what range your car should be in. Either way, you will want the appraisal value to be firm when it comes time to talk to the dealer about trading in your car. Be sure to have your car washed, waxed, and serviced, too - you will get a better price if it is in ship-shape condition.
HerTip: Always try to arrange your financing before you visit a dealer and start to negotiate the price. Pre-approved loans generally are good for a month or longer, so you should be able to shop for a while knowing that your financing is secure.
Continue to: Part V: Choosing the Right Car
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Determining how much car you can afford