Whether you're buying a new or used car, you have to finance
it. You have 3 options: paying cash, getting a loan, and leasing.
Besides being the simplest way to pay for a car, paying cash
gives you the best financing terms you will ever get--because
you don't pay any. By paying cash, you avoid paying the interest
payments that you must pay on a loan or lease. Depending on
the price of the car and the terms of the loan, you may potentially
save 20-35% in interest paying cash.
Even if you don't have enough cash to buy a car outright,
the faster you pay off your loan (and thereby pay with as
much cash as soon as possible), the less interest you will
pay. To calculate the difference between paying cash and financing
your car, use a Finance
vs. Cash Tool.
Because most people do not have enough cash to buy a car
outright, many use loans to finance cars. On the surface,
loans are simply an agreement to lend money for the right
to charge an interest rate on that money as it is paid back.
However, loans can be very complicated--if you want to pay
the lowest fees and interest rates, do some homework! Lenders
lend money to make more money, and there are ways to make
steep profits while appearing to give you a good rate. This
section will suggest steps to take to become more loan savvy
and point out resources that will help you complete each step.
Steps to Take:
- Obtain a copy of your credit
report and check it for mistakes that could either prevent
you from getting a loan or make you pay higher interest
rates (an estimated 20% of credit reports have significant
mistakes). Clearing your credit report of mistakes and understanding
your credit history will help you shop and negotiate for
- Compare sources of credit. Loans typically come from:
your car dealer, a local bank, credit unions, online (including
national banks or newer cyber-banks), or friends and family.
- Learn how to evaluate loan terms and how to identify lenders',
legal sleights of hand, which can mean higher rates and
Learning about financing is one instance where the Internet
has truly advanced our ability to conveniently, quickly, privately,
and comprehensively locate and compare information. Our monthly
payment calculator will also make it easy to compare the
monthly payments of different loans.
If you apply for a loan online, there's no appointment to
make at the bank, and no waiting for an approval process.
Even if you prefer to use financing offered at a car dealer
or a local bank, it pays to go online to find competitive
rates that your bank may try to match.
Leasing is essentially a long-term rental agreement in which
you pay for the right to use a car. At the end of the lease
term, you have the right to purchase the car for a price determined
at the beginning of the lease agreement. On one hand, leasing
is a great deal: you get a car that you couldn't afford to
buy, and you have a low down payment, and slightly lower monthly
However, if you end up buying the car, leasing is almost
always turns out to be more costly than a loan. And if you
don't buy at the end of the lease, you have nothing to show
for all those monthly "rental" payments. Even though cars
depreciate, buying them does give you at least some value
to work with when you buy another, either by selling it or
trading it in. To see the differences between leasing and
buying, you can use our Lease
vs. Buy Tool.
Since leasing is a legal agreement, it can also be inflexible.
You pay expensive penalties for exceeding the mileage limits
of the lease, undue wear and tear on the car, and ending the
lease before it expires. And while you lease the car, it is
your legal responsibility.
The one case when leasing may make good financial sense is
when the car is used for business purposes and/or your employer
helps with payments. But these advantages come in the form
of tax breaks--ask a tax advisor for help.