Determine How Much You Can Afford
Before you finance or lease a car, look at your financial situation to make sure you have enough income to cover your monthly living expenses. You may want to use the “Make a Budget” worksheet as a guide.
Should you take on a new monthly payment? Finance or lease a car only when you can afford to take on a new payment. Saving for a down payment or trading in a car can reduce the amount you need to finance or lease, which then lowers your financing or leasing costs.
Do you have a trade-in? In some cases, your trade-in will take care of the down payment on your new car. But if you still owe money on your car, trading it in might not help much. If you owe more than the car is worth, that’s called negative equity, which can affect the financing of your new car or the lease agreement. So, check “Auto Trade-ins and Negative Equity” before you do. And consider paying down the debt before you buy or lease another car. If you do use the car for a trade-in, ask how the negative equity affects your new financing or lease agreement. For example, it may increase the length of your financing agreement or the amount of your monthly payment.
Get a Copy of Your Credit Report
It’s a good idea to check your credit report and credit score when you are considering financing or leasing a car, and before you make any major purchase. You can get a free copy of your report from each of the three nationwide reporting agencies every 12 months. To order, visit www.AnnualCreditReport.com, call 1-877-322-8228, or complete 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 want a copy of your credit report, but have already gotten your free copy, you can buy your report for a small fee. Contact any 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
Usually, you will get your credit score after you apply for financing or a lease. You also may find a free copy of your credit score on your credit statements.
For more information about credit reports and credit scores, see:
- Free Credit Reports
- Disputing Errors on Credit Reports
- Credit Scores
What About a Co-signer?
If you don’t have a credit history – or a strong credit history – a creditor may require that you have a co-signer on the finance contract or lease agreement. Co-signers assume equal responsibility for the contract. The account payment history will appear on your credit report and the co-signer’s – which means late payments will hurt both of your credit. If you can’t pay what you owe, your co-signor will have to. Make sure that both you and the co-signer know the terms of the contract and can afford to take on the payments. For more information about co-signing your finance contract, see Co-signing a Loan.
SHOULD I USE FINANCING TO BUY A CAR?
Know Your Financing Options
You have two financing options: direct lending or dealership financing.
You might borrow money directly from a bank, finance company, or credit union. In your loan, you agree to pay the amount financed, plus a finance charge, over a period of time. Once you’re ready to buy a car from a dealer, you use this loan to pay for the car.
If you chose to finance your car this way, you can:
- Comparison shop. You get to shop around and ask several lenders about their credit terms even before you decide to buy a specific car.
- Get your credit terms in advance. By getting preapproval for financing before you shop for a car, you can know the terms in advance, including the annual percentage rate (APR), length of term, and maximum amount. Take this information to the dealer to improve your ability to negotiate.
You might apply for financing through the dealership. You and a dealer enter into a contract where you buy a car and also agree to pay, over a period of time, the amount financed plus a finance charge. The dealer typically sells the contract to a bank, finance company or credit union that services the account and collects your payments.
Dealership financing may offer you:
- Convenience. Dealers offer cars and financing in one place and may have extended hours, like evenings and weekends.
- Multiple financing options. The dealer’s relationships with a variety of banks and finance companies may mean it can offer you a range of financing choices.
- Special programs. Dealers sometimes offer manufacturer-sponsored, low-rate or incentive programs to buyers. The programs may be limited to certain cars or may have special requirements, like a larger down payment or shorter contract length (36 or 48 months). These programs might require a strong credit rating; check to see if you qualify.
Shop for the Best Financing Deal
Before you finance a car, shop around and compare the financing terms offered by more than one creditor. You are shopping for two products: the financing and the car. Negotiate the terms and consider several offers. Comparison shop to find both the car and the finance terms that best suit your needs.
Take the time to know and understand the terms, conditions, and costs to finance a car before you sign a contract. Know that the total amount you will pay will depend on several factors, including:
- the price you negotiate for the car
- the Annual Percentage Rate (APR), which may be negotiable, and
- the length of the credit contract
Many creditors now offer longer-term credit, such as 72 or 84 months to pay. These contracts can reduce your monthly payments, but they may have high rates. And you’ll be paying for longer. Cars lose value quickly once you drive off the lot. So, with longer-term financing, you could end up owing more than the car is worth.
If you sign a contract, get a copy of the signed papers before you leave the dealer or other creditor. Make sure you understand whether the deal is final before you leave in your new car.