You’ve made the decision: it’s time to get a new car. Now you’ve got to decide how to pay for it. You can either pay for the car in full, finance it or lease it. Let’s assume that you don’t have a pile of cash set aside for that first option. This narrows your choices down to two: leasing and financing.
But how do you decide which is the right choice for you? And what about all that financial lingo dealers throw around, what does it all mean?
If you’re shopping for a new or used vehicle for sale near Santa Clarita, take a moment to learn about everything you need to know when it comes to auto loans and leases. Then, apply for pre-approval and contact Hello Mazda of Valencia to take the next step in greater Valencia.
The Basics
When you think of financing, just think of loans. By financing, you’re essentially spreading out the full asking price of the vehicle over a longer period of time. This is done by borrowing the money you need from a financial institution near Sylmar like a bank or credit union, commonly referred to as the lender.
First, you apply for the loan for the vehicle, which an institution may or may not grant you based on your credit history. Once you get credit approval, you pay a down payment toward the loan — usually at least 20% of the cost of the vehicle, but you can put down whatever you can reasonably afford. The bigger the down payment you make, the less you’ll need to pay per month. After you make your payment and sign all the appropriate paperwork, the car is yours! You’ll just have to make monthly payments to the lender until you’ve paid back the full amount you borrowed.
If you’re financing a vehicle, you’ll be applying for credit. The total amount you will pay per month depends on multiple factors including the price of the vehicle, the Annual Percentage Rate (APR), and the length of the loan terms (shorter loans typically have lower rates but higher monthly payments). Loan terms for vehicles are typically 36, 48, 60, or 72 months.
As you make monthly payments, the loan amount will drop to zero, and you will own the vehicle completely.
When looking at how to figure interest on a car loan, we first need to touch on what interest is and the factors that impact it. If you purchase a car on credit, your lender owns your vehicle until it is paid off. The interest rate you pay is basically a fee you pay the lender for using their money to purchase your vehicle. What interest rate you end up paying your lender is based on a variety of factors, including:
When figuring out how to calculate auto loan interest for the initial payment you can use this quick calculation:
This gives you the amount of interest you pay the first month.
Once you have started to pay down your initial principal you need to calculate your new balance to work out the interest you pay in the following months. To do this:
While human error and number rounding mean you won’t have an exact calculation every time, this gives you a good basis for how to calculate the interest rate on a car loan.
Don’t get discouraged! With so many factors going into financing a new vehicle, you can still get an auto loan even with bad credit. Before you visit the dealership, determine your financial situation and budget. Get a copy of your credit report, so you know what to expect in terms of financing. Find a vehicle that fits your budget and go to a reputable dealer.
If you like the sound of driving something new every few years and saving money when making a down-payment, leasing may be right for you.
When you lease a vehicle, there are no loans involved. You establish lease terms based on how many months or miles you want to drive that vehicle (for example: 36 months or 36,000 miles at 12,000 miles per year). You make a down payment and pay a monthly fee, just as you would if you were financing. However, the down payment you make is lower when you lease, and your factory warranty covers the cost of typical maintenance issues that arise when you’re buying to own.
When your lease term is up, or you’ve reached your mileage cap, you must give the car back to the dealership and pay any excess depreciation or mileage fees (if any). The car also must look as close to how it did when you got it as possible, so accessories you added have to be removed and permanent alteration or customization isn’t allowed. You may have the choice of buying the car at its residual value, but most people typically lease a different vehicle under a fresh term, or buy a new or used vehicle.
It’s also good to keep in mind what you want to do with your vehicle. If you’re planning on hauling boats and trailers around on the weekends or consistently heading off the beaten path, it may be unwise to lease your vehicle. If you damage or scuff up a leased vehicle through regular use, you’ll need to either get it fixed before you turn it in or pay excess depreciation fees when you return it to the dealership, all for a car you don’t own.
And if you plan to put in some serious mileage in your vehicle through long-distance business travel or frequent road trips, you could easily blow past your lease’s pre-established mileage limit. Then, at the end of the lease, you’ll have to pay for every mile you’ve driven beyond that limit, which at 10 to 25 cents per mile can add up quickly!
If you’re living in a more suburban or rural town right now but expect to be moving to a crowded city in the next few years, you may decide that taking out a loan is not the right move financially. You’ll be locked into a longer-term payment plan, which may become a small burden. For example, you’ll have to regularly pay things like garage, permit, and car insurance fees if you bring your vehicle into the city, all when it may be easier and more affordable overall to just use public transit. If you lease, you can drive the car that you need for the next 36 or 48 months and then cleanly return it before you move into the city.
On the other hand, if you see your living situation changing as you move away from the city or out of state, it may be wiser to finance. You won’t need to come back to return your car to the dealership you leased it from, and you’ll have a vehicle to drive for as many years as you need it. You can even sell your vehicle for some extra income, or give it to your children when they get their drivers’ licenses.
Before you even get to the lot do a self assessment to determine what you need in a vehicle.
If they can’t answer or you don’t understand, it’s probably not a wise investment or the right place for you to buy from.
If you feel pressured or uncomfortable while making your purchase think about buying somewhere else. You should never purchase something in which you don’t see the value.
