So you've decided on the perfect car. Whether it's pre-owned or brand new, now it's up to you to make it happen. Ever heard a dealer say "What can I do to get you in this car?" Well, the answer rests in a series of questions you and your spouse should ask yourselves.
Buying vs. leasing
This is the first decision you need to make. Although the decision whether to buy or lease will involve your checkbook in different ways, it is also a lifestyle decision, and one that may effect how you buy cars in the future. According to Chris Cirignano, General Manager at Toyota of Buena Park, "It all comes down to what [the customer's] monthly payments need to be."
When does it make sense to lease?
It is becoming more and more popular for customers to examine the option of leasing their vehicles. "If you don't have a down payment, and need to keep your payments low," leasing might be your best bet, says Cirignano. If you have excellent credit, dealers will frequently make leasing a car an attractive option by running specials for certain vehicles, some requiring no down payment at all.
Another advantage to leasing is, the period that leases typically run (two to three years) falls well within the warranty of the car. That means you aren't responsible for major repairs. Of course, as a lessee, you are required to return the vehicle to the dealership in the same condition you acquired it. Dents, dings, carpet stains, and minor repairs like broken taillights and paint scratches are your responsibility. The same is true for the mileage on the car. Most leases allow you to drive your vehicle 12,000 miles a year. If you drive your car more than that, you will probably pay a fee for every mile over the agreed upon amount.
Lastly, if you plan on getting a new car every two to three years, and don't want to deal with the hassle of selling or trading in your car, leasing is a good option. One caveat: a traditional dealer lease is not a "rent to own" contract. Some customers who are new to the idea of leasing believe that at the end of their lease, they will be offered a good price to take the car permanently. This is a mistake. "At the end of a lease, it is usually cheaper to get into another brand new car," says Cirignano.
When does it make sense to buy?
However convenient leasing may be, most Americans still prefer to own their cars. One undeniable advantage of buying a car outright is that, once it's paid for, it's yours. You have no mileage limitations, you are free to customize the car however you like and repair it, if and when you want to. And once all associated loans have been paid off, your car becomes equity. The next time you go car shopping, you have a vehicle to trade in, or one to sell on your own, using the money you make as a down payment. "Buying is a better option if you plan on keeping the car for a long time," says Cirignano.
But in order to keep your monthly payments low, you'll need a good down payment. A down payment can be in cash or in the form of equity, if you trade in the vehicle you're driving. Usually, a customer will take out an auto loan from a bank or credit union, or secure financing through the dealership, to cover the balance. The balance of the car price then translates into your monthly payments. Thus, the more cash that's available for you to put down, the lower your monthly payments will be.
Most auto loans are stretched over three to five years, depending on the preference of the customer. If you need very low monthly payments, a longer loan will keep your costs per month down, although you will wind up paying more interest. If you are a college graduate, be sure to check with the dealer regarding any "First Time Buyer" programs that are available.
Financing
The financing involved with a leased car is relatively simple: because the dealer owns the car, the dealer is the financier. Your credit will determine what finance rates apply.
Make sure to go over all contracts with a fine toothed comb, confirming the period of your lease, the car (and options) you are leasing, and the interest rate that will apply to your loan. If you have decided to buy the car, you'll need to figure out how to get all the money you need together. Knowing what your down payment will be allows you to figure out how much money you'll need to borrow. Now all you need to know is who to borrow it from.
Whether you have good credit or not, the dealer will almost always offer to finance the car for you. This means your down payment goes to the dealership, and the dealer applies an interest rate to your monthly payments. The dealership keeps the title until the car is paid off, and then it's yours -- free and clear.
If you decide to obtain an auto loan from a bank or credit union, the bank will issue you a cashier's check for the total amount of the car, buying it outright from the dealer. The bank or credit union receives the title of the car, and you make your monthly payments to the bank.
If your credit is good, a dealership may offer you an interest rate that is competitive with your bank or credit union. However, dealerships are not financial institutions. As such, they generally cannot offer the lower rates that your bank or credit union can. Like any other major financial decision, shop and compare interest rates quoted by the dealership, your bank, and your credit union. And, as always, make the decision that works best for you.