Once you've settled on a particular car, you have two payment options
- Paying in full
- Financing over time (loan or lease)
Financing increases the total cost of the car because you're also paying for the cost of credit, including interest and other loan costs. Also consider how much money you can put down, the monthly payment, the loan term, and the Annual Percentage Rate (APR). Rates usually are higher and loan terms shorter on used cars than on new ones. Dealers and lenders offer a variety of loan terms. If money is tight, you might consider paying cash for a less expensive car than you first had in mind.
In general, you should look for loans with no prepayment penalties.
Determine your down payment
Decide how much of your savings you want to use for a down payment. The more you put down, the less you need to borrow and the smaller your monthly payment will be. Also, many lenders offer discounts for loans that are under 90% loans to value.
Rebate or special dealer financing
Whether you choose to take a rebate or special dealer financing depends on several factors:
The price of the car
How generous the rebate is
The interest rate offered by the dealer or lender
Lease or buy
Leases and loans are two different methods of vehicle financing. When you lease, you finance the use of a vehicle; when you buy, you finance the purchase of a vehicle.
When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. This typically includes a down payment, sales taxes, and an interest rate determined by your lender. The monthly payment on an auto loan is determined by several factors:
- Loan size
- Interest rate (determined by your credit history)
- Loan term
- Amount of down payment
When you lease, you pay for only a portion of a vehicle's cost, which is the part that you use during the time you're driving it. You may or may not have to make a down payment, sales tax is only charged on your monthly payments (in most states), and you pay a financial rate, called a money factor, that is similar to the interest rate on a loan. You may also have to pay special lease-related fees and a security deposit.
- Drive a new car every two or three years
- Lower monthly payments
- New car has the latest safety features
- Car is always under warranty
- No ownership equity
- Must be aware of mileage driven
- Must properly maintain your car
- Cannot customize car
- You'll pay more over the long term if you decide to purchase your vehicle at lease end
- Ownership equity that translates to potential trade–in or resale value
- Can pay off your loan to be payment-free for a while
- Don't have to keep an eye on mileage
- Can customize your car
- No risk of surprise lease–end charges
- Higher monthly payments
- Unexpected cost of repairs after warranty has expired
Using your home's equity to finance
If you have equity in your home, you can take out a home equity loan or line of credit to finance your vehicle.
Buy out your current lease
Call the number listed on your monthly payment slip and ask for the "buyout amount" for your leased vehicle. The buyout amount may be slightly different from the residual because they will deduct your security deposit.
You can try to negotiate a lower buyout amount by speaking with someone who has the authority to make a deal. Have a figure in mind at which to start negotiations. Check NADAguides.com to get estimates on your leased vehicle's current value.
Allow several weeks to negotiate a buyout figure for your leased car. Once you've agreed on a buyout amount, you can proceed to purchase the car just like you would purchase any other used car, by paying in full or securing financing through your lender.
Refinance your current car loan
If interest rates drop, you can usually refinance your current car loan. When refinancing car loans, you pay off your current car loan with a refinancing car loan from a different lender that has a lower APR. The process is very similar to financing a new or used car. An appraisal is not required, however loan to value restrictions will apply and are calculated based on the book value of your vehicle.