You’ve taken the exciting leap: it’s time to shop for 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. Buying outright might sound dreamy, but let's face it, most of us aren't sitting on a mountain of cash ready to splurge.
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 considering financing, it's essentially about spreading the full price of the vehicle over an extended period. This involves borrowing the required amount from a financial institution, such as a bank or credit union, often referred to as the lender. When you opt for vehicle financing, you'll need to apply for credit. The monthly payment amount is determined by various factors, including the vehicle's price, the Annual Percentage Rate (APR), and the loan term length. Generally, shorter loan terms come with lower rates but higher monthly payments. Common loan terms for vehicles range from 36 to 72 months. As you continue to make monthly payments, the loan balance will decrease until it reaches zero, at which point you'll own the vehicle outright.
DTI determines your available income. It includes all outstanding debts, including rent/mortgage, monthly utility bills, credit card debt, and other loans you may have. DTI should be under 50%.
PTI is the amount of the monthly vehicle payment compared to your monthly gross income. A reasonable PTI is around 15%.
LTV is the amount financed compared to the vehicle’s worth. If you finance a car for $19,000 and the vehicle’s value is $20,000, you would have a 95% loan to value
You apply for a loan for the vehicle, which an institution may or may not grant you based on your credit history.
Upon receiving credit approval, you make a down payment towards the loan. Typically, this is at least 20% of the vehicle's cost, but you can contribute whatever amount you find feasible. A larger down payment reduces your monthly payment amount.
After completing your payment and signing all necessary documents, the car becomes yours! You'll then make monthly payments to the lender until you've fully repaid the borrowed amount.
Don’t get discouraged! Even with challenges like bad credit, securing an auto loan is still possible. Before heading to the dealership, assess your financial standing and set a budget. Obtain a copy of your credit report to understand your financing expectations. Choose a vehicle that aligns with your budget and visit a trusted dealer.
Find the vehicle that fits your needs. Explore personalized options, plan your budget, and compare with ease – start calculating your car loan payments with our Auto Loan & Car Payment Calculator now!
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.
The total cost of the vehicle that is used to calculate the lease payments. It includes the vehicle's selling price, taxes, fees, and any additional costs.
The fee charged if the lessee exceeds the agreed-upon mileage allowance. This fee is typically charged per mile.
A fee charged by the lessor at the end of the lease term to cover the costs associated with inspecting and selling the vehicle if the lessee chooses not to purchase it.
Optional insurance that covers the "gap" between the vehicle's actual cash value and the amount owed on the lease if the vehicle is declared a total loss due to an accident or theft.
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.
