Car Loans & Leasing
The content contained on or made available through this website is not intended to and does not constitute as legal or investment advice. Please use and refer to the information at your own risk, and consult with a professional before making any finance-related decisions. Refer to the full Terms & Conditions here. Last updated January 1st, 2020.
Create a budget
Decide upon purchasing new, used, or leasing
Find a car that suits your needs and fits your budget
Factor in the cost of car insurance, additional fees, etc.
Do your research and approach dealerships knowledgeably
There are three main methods of acquiring a car: purchasing new, purchasing used, and leasing. Each option has its own advantages and disadvantages. Below is a breakdown of tips and considerations to help make the best decision possible for you.
Purchasing new typically refers to various financing options. Most people are unable to pay $20,000+ out of pocket for a brand new car. Instead, they will take out and repay a loan for an average of 60 to 72 months. During the loan’s term, the bank holds the title to the car as collateral, similar to a house with a mortgage. The interest rate you receive on the loan will vary significantly based upon the lender, car price, and your credit score.
The biggest consideration here should be how long you plan on owning the car. If you plan to use a car for at least 5 (and preferably closer to 10) years, then purchasing new is a reasonable option. Make sure that the car you decide upon is well within your financial means. New cars depreciate quickly, so it is unwise to view any purchase as an investment. Lastly, be sure to factor in car insurance, registration fees, and other costs of ownership.
Cars purchased new from dealerships often come paired with 3 to 6-year warranties. This means that any manufacturing-related issues that arise will be covered for this period of time. But once the warranty is over, you are on the hook for all expenses, which can add up quickly. Take your time; do your research. Find a good deal (well below list price) on a car that has high scores for long-term reliability.
The options for financing a used car are similar to those of a new car. The difference is that many people can afford to pay used car prices (often in the range of $5,000 - $10,000) immediately out of pocket. Depending on interest rates, this may or may not be the best decision. If interest rates are low, financing a smaller auto loan can improve your liquidity and free up cash for other purposes (e.g. investing for retirement). Due to cars’ quick depreciation, with enough research you will often be able to find a great deal on a used car that can last for many years.
Buying used is a good option for those who either are on a budget or are alright with not having the latest year’s model. Cars depreciate in value most quickly in their first few years of life (including the moment they drive off the dealership lot!). As a result, owning a car through years 5-10 are substantially cheaper than owning a car in years 1-4.
Take your time and find a car that suits your needs. Once you do, run the vehicle’s identification number online to check for any red flags. Test-drive the car. Negotiate the price. And lastly, ensure that the payment plan (and contract overall) meet the needs of both the buyer and the seller.
Leasing a car can be tricky. In addition to the current price of the car, leasing also includes an estimation of future value called the residual. In terms of a mathematical expression, a theoretical monthly lease payment can be broken down as follows:
The first half of the formula represents the cost of depreciation. The key pieces are the Current Value (selling price with a few additions), Residual Value (often expressed as a % of MSRP), and number of months in the lease term.
The second half of the formula represents the cost of financing. The key pieces are the Current Value, the Residual Value, and the Money Factor (which equals the annual interest rate divided by 24).
A few things to note:
The higher the Residual Value, (e.g. 65%), and the lower the Money Factor (e.g. 0.00125, or 3%), the lower your monthly payment will be.
You may point out that the second half of the formula does not make much sense. Why add the Current and Residual values? The answer: this is actually an approximation method used by financing companies to simplify their accounting.
Check out the Finance in a Flash Car Lease Calculator!
Leasing a car is a good option for those that enjoy having a brand new car every few years, are willing to bargain hunt and negotiate, and/or prefer owning a car only during its warranty period. Standard leases run from 24 to 36 months and come with annual mileage limits. If you drive very frequently or have a long commute to work, leasing may not be an attractive option; fees for exceeding mileage limits can be as high as 25 cents per mile.
When approaching dealerships for lease deals, knowledge is key. Understand the factors that go into a lease price, and have an idea of what the dealership can and cannot offer. One thing to look out for is high residuals. These are often set by the manufacturer and signify that, for whatever reason, their main goal is to get the cars out on the road as quickly as possible. These are fantastic opportunities for value-hunting lessees.
Keep in mind that dealerships will also throw in various fees (e.g. acquisition fee, plates, tags, title, registration), all of which are negotiable. Lastly, when avoidable, do not provide the dealer with a down payment. These can be easily factored into your monthly lease rate, but would otherwise be lost if, for instance, you totaled your car right after driving it off the lot.
The most cost effective method of car ownership is typically to purchase a used car with high reliability ratings. However, if out of warranty, this method does come at the risk of high and unexpected repair costs. Reduce this risk by properly vetting the seller and car history.
Whatever the decision, every option has one thing in common: you will be much better off by doing your research. Both new and used car dealerships are known for not leading with their best offer. Come in knowing what you should and are willing to pay, and don't be afraid to walk out if the deal isn't right!