Car Financing OptionsHow to Pay for Your
New CarBy Philip Reed
You're sitting in the dealership when the salesperson asks, "So, how are you going
to finance your car?"
The question leaves you a little confused. What is he really asking?
In the car business, the term financing is loosely used to mean that the dealership
will either provide you with an auto loan to buy the car or lease the car to you.
The opposite of "financing a car" would be buying it outright with one cash payment.
Many people like the convenience of getting a loan through the dealership. They
can walk in, choose a car, fill out a credit application and drive away in a new
car. They can do this at night or on the weekends when banks and credit unions are
closed.If you have sterling credit, you might get a competitive interest rate and
be eligible for special programs that lower your cost.
So, going back to the salesperson's question, "How are you going to finance your
new car?" your answer could be one of three things:
- "I want to buy the car."
- "I want to lease the car."
- "I will be paying cash for the car."
Let's look in more detail at each of these financing options so you can know what
to expect at the dealership:
"I want to buy the car."
If you decide to buy the car and you want the dealership to help you finance it,
you will be asked to fill out a credit application. Based on your credit score,
an auto loan will be arranged through the dealership's lending institution based
on the negotiated price of the car and related expenses (sales tax, title and licensing
fees). Loaning money is big business, and most auto manufacturers have their own
companies to arrange car loans.
You will probably be asked how quickly you want to pay off your new car. Most auto
loans are from three to five years -- 36 to 60 monthly payments. Different lengths
of time can be arranged, if desired. Obviously, the longer you take to pay off the
loan, the lower the payments will be. In addition, the amount of your monthly payment
will depend on the interest rate, the length of the loan and the amount of your
down payment. Keep in mind that the dealership will urge you to make a large down
payment.
While you are paying off the balance you owe on your car, the lending institution
will hold the car's title. Once all the payments are made, the car's title is sent
to you and you finally own the car.
"I want to lease the car."
If you decide to lease the car, you will also be asked to fill out a credit application.
Based on your credit score, and the length of the auto lease you want, the dealer
will shop for a lease for you. Using a sophisticated computer program, numerous
banks will be contacted. Each bank will have different terms and conditions.
Most auto lease contracts allow you to drive the car 12,000 miles a year. If you
typically drive more than this, ask that the car lease be written for 15,000 miles
or even 18,500 miles. This will raise your monthly payments but save you money in
the long run.
Your contract will contain a residual price for the car you are leasing. When you
have made all the lease payments, you can then buy the car for this residual price
If you decide to return the car to the leasing company, they may charge you for
excessive wear and tear to the vehicle. If the car is in great shape, you can get
your security deposit back or use it to start the lease of another new car.
"I will be paying cash for the car."
Paying cash for a new car makes the transaction very simple -- all you need to do
is negotiate the price of the car and then write the dealer a check for this amount.
This removes several variables from the negotiation process: the down payment, the
interest rate and the monthly payment.