There are almost as many options for financing a vehicle as there are cars and trucks to choose from.
You want a dependable vehicle that you'll be proud to drive for many years to come, but do you want to end up with a lemon of a finance deal?
Just as you should never purchase a car just because it looks good, you should never sign on to a vehicle finance contract just because it sounds good. You need to do your research and put both the car and the finance agreement under a microscope before you commit to buying or leasing.
In a typical auto purchase, you drop by the car dealership and brace yourself for an extended round of document signing. You have three main options on your road to one of the greatest feelings in the world, the pride of new car ownership: buy the vehicle, lease the vehicle, or slap down enough cash to cover the sticker price.
Nowadays, vehicle financing is big business for carmakers and dealers, and the big manufacturers have their own networks for financing auto loans. If you buy a vehicle at a Nissan dealership, for instance, you will be financed through the Nissan Motor Acceptance Corporation.
You can get your auto loan through your own bank or another third-party lender, but it's just so convenient to have this one-stop shopping convenience. Heck, they'll hook you up with the car, financing, temporary insurance, licensing, and whatever else it takes to get you in that vehicle and off their lot as soon as possible.
If you want the car dealership to help you finance your dream car, your credit score will determine the terms of your loan. Sales tax and title and licensing fees are included in the negotiated price, and dealerships are eager to finance your purchase.
Next, you have to decide the length of the loan, typically between 36 and 60 months, or 3 to 5 years. The longer you take to pay off the car note, the lower the monthly payments will be, but the amount of the payments are also greatly affected by your interest rate and the size of your down payment. Needless to say, car dealerships will try to get the largest down payment possible from you before they hand over the keys.
During the term of the car loan, the lender holds the pink slip. After you've made that final payment, the car's title is mailed to you, and it's finally all yours. Until then, drive carefully for heaven's sake - it's not your car - and use your turn signal when you change lanes!
If you choose to lease a vehicle, you'll also be asked to fill out a credit application, but this time the salesman or dealer will use a computer database to shop around for a lease for you. Based on your credit score, the car you want, and the length of the lease, banks will offer different terms and conditions.
You should opt for a three-year lease, and you want to try to pay as little as you can up front. Tell the dealer that you want to pay only the drive-off fees. Did you know that most auto lease contracts allow you to drive 12,000 miles a year? So if you need more miles per year, ask the dealer to write the lease for 15,000 or 18,000 miles. It will increase your monthly payments, but it will save you a bundle if you drive a lot.
When you sign a car lease, the contract will include a residual price, or the price you can buy the car for after all the lease payments have been made. If you want to return the vehicle back to the dealer at the end of the lease term, be prepared to be hit with wear-and-tear charges if the car is in shoddy condition. We offer calculators to estimate the cost of leasing and compare leasing versus buying.
If you walk into the dealership and plunk down a shoebox full of cash, you may be mistaken for a bank robber. Then again, you'll get to negotiate the true cost of the car, without all the extra junk dealers add on when they do the financing.
This simplifies and shortens the negotiation process because you won't have to haggle over the down payment, interest rate, or monthly payment.
But if you actually had the cash lying around to buy a car outright, you probably wouldn't be reading this article, so let's see what buying a car with cash really means for most people.
It means you are financing the car through an outside source, or borrowing the money from a third-party lender to make you a cash buyer at the dealership. Again, the dealer won't be able to bamboozle you with confusing terms and hidden costs - you are looking for the bottom-line cash price.
Many lenders specialize in auto loans, and if you are approved for a loan, you will be issued a bank draft (like a cashier's check) that can be made out to the dealer. Some internet lenders like Up2Drive.com can arrange everything online.
Timing is crucial when buying a car. If you catch the right deal at the right time, you can save hundreds or even thousands of dollars on the transaction.
You've all heard the opinion that the best time to buy a new car is in December when dealers are falling all over themselves to meet their annual sales goals. Unsurprisingly, it's still good advice. When you buy at the end of the calendar year, the dealer is most willing to negotiate, and it's more of a buyer's market than usual.
But what if your old Ford Pinto dies in February? Or what if you won't have enough down payment money saved up until next June? Will you miss out on the best deals and those legendary year-end bargains? No, you can snag a great deal at any time of the year if you use the same logic as the December car sales that literally put the buyer in the driver's seat.
At the end of the day, the sales staff and finance department are anxious to go home, but salesmen will never turn away a serious customer just because the dealership is about to close. Car shoppers can often hammer out a great deal because the salesperson may make concessions or bow to your demands in an effort to speed up the process.
You can use this same game plan at the end of every month, too. You may find it less stressful than keeping the dealership open after hours, and there's a second benefit: many salesmen get a bonus on each sale after their monthly quota is met, so the end of the month is their favorite time to close deals.
In fact, anytime there's a lull in foot traffic at the dealership, like rainy days and blustery evenings, you'll be able to swing a better deal than someone who tries to negotiate when the dealer is busy.
If you own a television set, you already know about two of the ways carmakers try to lure you into signing on the dotted line - auto rebates and low-interest financing, usually at rates far below the going auto loan rates. You can get either low-interest financing or a manufacturer's rebate, but you can’t get both.
Use this handy calculator to compare the benefits of a manufacturer's rebate and low-interest financing. We'll use actual data from a recent purchase at a Fiat dealership to demonstrate.
The Fiat 500 Electric costs $22,000 (before tax) and the manufacturer's rebate is $2,500. The going interest rate is 7%, but the dealership is offering a 1.9% rate to get your attention. The loan term is 5 years and the local sales taxes amount to 7%. Enter all this into the calculator and press "Calculate."
It's that simple. The calculator shows that it's a close call because your monthly payment under the rebate plan would be $362, and your monthly payment under the low-interest financing option would be $357. In this case, the total amount saved by choosing the low-interest financing option would be just $5 a month. Still, it's a savings.
When you take advantage of cash rebates, you save a lump sum of money at one time. When you choose low-interest financing, your savings are spread out over time.
The important thing is to do some research on the cars you like. After that, you should find out about all the available rebates, special rates, and other deals before you ever set foot in a dealership.