Determine Your Budget, Including Wiggle Room
Analyzing your financial situation is the first recommended step when making any purchase decision. If you decide you’re interested in buying a vehicle flat-out, leasing, or financing a car, your financial situation should be able to support that decision. You need to make sure that the additional costs incurred from purchasing or leasing a car don’t leave you in a state of financial deficit. That’s why it’s a good idea to break down the costs into smaller increments.
A car, more often than not, is a luxury. Usually, car payments are handled on a monthly basis. So, it’s a good idea to look at your monthly budget. Are you in an okay financial position to take on extra bills? If not, your best is to hold off. If you’re willing to wait, or already have a car, you can always trade it in or save up to place a down payment on a car, which can lower your financing costs.
If you’re one of the lucky few who currently own a car but it’s starting to give you problems, it may be time to consider trading it in. Some dealers will take an old car in lieu of a down payment. However, this only applies if your car is paid in full. If you owe more than the value of your previous car, that is negative equity, which will impact your future financing. In this case, the best option is to ask upfront what the implications of this will be on your potential acquisition.
Get a Credit Report
No matter what kind of major purchase you’re making, it’s good to understand your credit history. It’s simple to get a hold of your credit report. These reports contain your overall credit score and can be accessed for free once every 12 months. To order your own report, visit www.AnnualCreditReport.com, call 1-877-322-8228, or fill in the Annual Credit Report Request form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
If you would like a copy of your credit report but have already gotten a free copy, you can purchase your report for a small fee. Contact one of the three nationwide credit reporting agencies:
- Equifax Credit Information Services: 1-800-685-1111
- Experian: 1-888-397-3742
- TransUnion Corporation: 1-800-916-8800
Often, your credit score will be given to you when you apply for financing or a lease. Some credit card companies may include a free copy of your monthly statements as well. But collecting your own information is always a good thing.
What About a Co-signer?
If you have a weak or nonexistent credit history, you may be asked to find a co-signer for your purchase or leasing agreement.
A co-signer basically assumes equal responsibility for the obligations of your contract. Accounts payable information will appear on the credit statements of both you and your co-signer. This means that any late payment or failure to pay will result in an impact on both of your credit scores. If you can’t pay, your co-signer will have to. It is critical to have a transparent, honest dialogue with your co-signer before entering into an agreement. To learn more about co-signing,
Know your Options
You have two options for financing: direct lending and dealership financing.
- Direct lending: This is when money is borrowed directly from a bank, financer, or credit union. Your loan contract will state that you need to pay the amount financed, as well as an additional financing charge, by the end of the contract term. When you have enough to purchase from a dealer, this loan will be put to use.
- Dealership Financing: This is organized through the dealership where you’re purchasing or leasing your vehicle. A contract is created for the client and dealer, stating that you (the client) agree to pay the amount agreed upon as a finance charge, along with the amount financed. The dealer then sells this contract to a bank, finance company or credit union that collects your payments for them.
If you choose to go the direct lending route, you can comparison shop and visit several different dealerships to inquire about their credit terms. Surely, you’ve heard the commercials advertising low finance options.
You should make sure to get pre-approved for financing before shopping. This will let you hold some knowledge on what terms to expect, what annual percentage rate you’ll get, the length of the financing terms, and the maximum loan. Bringing this information to the dealership can improve your ability to negotiate and make sure you don’t get taken advantage of.
Dealership financing can offer convenience. Much of the process is taken care of, and it will all happen within the walls of the dealership. These businesses are likely to offer financing options, as it’s common to have existing relationships with various financers. Additionally, dealers are sometimes able to offer manufacturer-sponsored incentives. They may have special requirements but could save you money in the long term.
Be thoughtful and take time to truly understand the terms and costs of financing before signing on the dotted line. The price that you’ll pay will depend on:
- The price you have negotiated for the car
- Your annual percentage rate
- Credit contract length
Many creditors offer long payment terms. Longer-term plans can reduce monthly payments, but they may have a higher finance percentage rate. You will also be responsible for these payments for longer. Cars lose value every day they spend off the lot, so the longer your financing term, the less value your car will have once paid off.
With any contracts, make sure to get a copy of the signed documents before you leave the premises. Confirmation of a deal is final so make sure it’s right. Especially before you leave in a new car!
Below is an example of how different financing contract terms work out financially:
|Term||4 Years – 48 months||5 Years – 60 Months|
|Taxes, Title, and Required Fees
Down Payment (20%)
|Contract Rate (APR)||4.00%||4.00%|
|Monthly Payment Amount||$655||$534|
|Total of Payments||$31,440||$32,040|
Dealer Financing: The Ins & Outs
Most dealerships will have an insurance and finance department. These teams are in charge of educating customers about the financing options available. The manager of the department will likely ask you to complete a credit application, which usually asks for:
Most large dealerships will be able to access a copy of your credit report, as well as information made available about you on public records.
Asking the Important Questions
Make a game plan. Writing down the questions, you’d like the answers to are a good idea before you even begin to shop. Take this list with you and cross off each question you ask as you go.
What manufacturer incentives can the dealership offer?
Reduced finance rates and cashback on certain models are just some of the benefits you might miss out on if you don’t ask about them. Ask direct questions about the most appealing model you’ve found and inquire about whether or not there are any special offers that can be applied to it.
Rebates, savings or special pricing
Do you qualify for any rebates or discounts? In order to offer these promotions, dealers must clearly explain what is required in order to qualify for the incentive. Do your own research – find out if there are any special pricing models that apply to you. Some of these may include student or new grad discounts, savings for military personnel, or special offers on older models. Never assume that you are being considered for these savings – advocate for yourself.
When no special financing models are applicable to you, negotiating the annual percentage rate (APR) and payment terms can be done with the dealership’s finance department. The APR usually comes with an amount that compensates the dealer for their work handling the financing. APR depends on credit ratings.
Should I Lease?
In a lease, you agree upon usage for an agreed-upon time frame and a certain amount of miles. What makes leasing different from buying is that monthly payments on a lease are usually lower because you are only paying for use, not ownership. Depreciation plus rent charges, taxes, and fees are the fundamental basics of lease payments.
Does Leasing Suit My Lifestyle?
Consider all costs, from the start to ending of the term. How long do you hope to keep the vehicle?
Compare different terms and conditions from multiple dealers, including mileage. Give your driving habits, some thought. Consider if the mileage allotted to the lease agreement is too high or too low for your habits. Going over the agreed upon mileage will mean you’re constantly incurring driving charges to be paid when the car is returned.
You are responsible for excess wear, damage, and any missing equipment upon the return of the vehicle. Service is most often the responsibility of the lessee, as typically described in the contract. If you sign and decide leasing isn’t for you, this early breaking of the contract will cost you. Could you absorb this cost in the event that you change your mind?
Also, consider your location. Are you anticipating a move or career change? Some contracts require the car to stay within a geographic area during the course of the lease.
Do you have a service profession, or have you had one in the past? Federal laws allow early contract terminations without supplementary charges if you meet the following conditions:
You leased before your service started and went on active duty for at least 180 days
You leased a car and then got stationed across the world.
Keep a hard copy of any credit contracts or lease agreements with signatures and terms accurately filled in. Do not leave the dealership without these documents. If you financed, remember the following:
The creditor has a lien on the car until the contract is paid in full
Late or missed payments can cause you to incur fees or legal prosecution. It will also negatively impact your credit score and report.
Some dealers track their cars, which may lead to repossession if you’re late or miss your payments completely. Find out if there will be any devices placed in your car for this purpose. Not that you’d ever want to be late or miss payments anyway, but it’s good to have the information.
If the bank or dealerships calls you back because of issues with financing or contracts, carefully review any and all changes. Do you still want to proceed? If you do not feel confident in the new arrangement, explain that you want to cancel and unwind the deal. If you do terminate the deal, be sure the application and all documents related to the contract have been destroyed.
If you worry you may be late with a payment, contact your creditor. Many of them are experienced with these situations, and they may be able to amend your original deal and change your terms. Some states have different laws where creditors can pursue legal action if financing terms are not met, so best to check your local laws before making any rash decisions.
Do What’s Best For You
This article has a lot of information, and you may be feeling overwhelmed. Yes, there is more to car shopping than picking out colors and features. But, that doesn’t mean it won’t be a positive experience. Know your situation, likes and dislikes, and priorities for a vehicle and financing terms.
Relax, stay informed, and have fun!