In the same week that my friend’s wife bought a new Mini Cooper, my friend decided to lease a new Mazda for his business. Like most people, this young couple didn’t have the money to pay outright for either car, so they worked out two different credit solutions.
Before committing to a financing program, “Know your options. Know the law.”
- Decide how much you can afford to pay each month. Make sure that your new monthly payments will not stretch your budget to the point where you will be tempted to delay on-time payments. Look over your monthly bills and decide how much you can manage without creating more stress in your life. Check your credit report and score before applying so you know what to expect. Correct any mistakes in your report before applying for financing.
- Visit several car dealers so you can be sure you are getting the best value for your money and the best financing deals available. Also check out other funding sources, such as banks and private lenders who might help you.
- I strongly recommend you seek pre-approval from an outside financing company before shopping for your car. Another way that car dealers make money is by adding points to your auto loan. You may qualify for a 4% interest rate but get 6.5% at the dealer. The car dealer gets the extra profit on the increased interest rate.
- Calculate the down payment you can afford. Whether you lease or buy, you will most likely be expected to hand over a chunk of money upfront.
- Decide whether to lease or buy. Leasing a car means you do not own it. When you lease, you are essentially renting a car from the dealer. After several years of monthly payments, you will most likely not have equity in the car, although you may be given the option to buy out the balance due on the car, based on its depreciated value. If you buy your car, you own it. Depending on your mileage and they way you care for your vehicle, you can continue driving your car for years after you have made the final payment.
- While car dealer ads often tout low-interest rates for car loans and leases, those rates vary according to the fine print. Your rate will be determined by your credit rating and credit history, as well as the length of the loan. While the purchase price may be affordable, the interest rate charged will drive the cost of your new car well above the purchase price. For my friend’s car in the example above, financing increased the purchased car to approximately 1.5 times the actual cost of the car, or another 50 percent over time. That said, financing can allow you to drive a new, safe and reliable car — if you can afford the monthly payment.
- Consider your driving habits. Leasing also comes with restrictions, such as the number of miles you may drive per year without having to pay a penalty. If you have a long commute to work, travel extensively, and expect heavy mileage, you might be better off owning than leasing.
- Consider how you will manage if costly, life or business events crop up. Do you have children ready for college? Will upcoming tuition payments, student loans or parent loans make it difficult for you to manage a new car payment? What will you do if a member of your earning team loses a job or must take a leave from work? Do you have a nest egg or reserve that will cover car payments in the meantime? Have you considered a supplemental insurance plan that will provide money if the unforeseen happens?
It’s important to drive a reliable car and, when needed, to procure fair credit terms, to make that happen. If you have questions about financing, legal language, how to get pre-approved for a loan, how to repair a bad credit report, how to build up your credit, or whether a contract is fair to you, contact Daley Law