For many Americans, a new car is their second-largest purchase aside from a home, so it pays to explore and carefully consider financing options. Although not as complicated as a mortgage, new car financing can be tricky and expensive if you're not careful. Work out a monthly budget first to get an idea of what you can afford, and don't forget to add insurance, fuel and maintenance costs in your total.
Dealer financing can be very convenient: Walk into the dealership, haggle a bit, sign the papers and drive away with your new car. But remember that a dealer's primary interest is to make as much money as possible on the sale, so although you may get a great price on the car, you may not always get the best finance deal and end up paying more in the end. Dealers generally work with several banks and finance companies to suit different buyer situations, so you can get a good deal if you're number-savvy and don't give in to pressure easily. Consider dealer financing only after you've explored other options.
Financing through your bank or other lending company may present the best financing option for your new car. Banks and lenders don't have specific dealer interests in mind, and generally don't engage in interest-rate games the way dealers might. You simply tell them how much you need to borrow and they'll shoot you a payment with the interest rate tacked on. Pre-approval for a new car loan is a smart way to go, as you'll know exactly what you can afford upfront and will often save the loan application fee that some dealers charge.
It may seem pretty cool to walk into a dealership and pay with cash, but it might not always be the best option. You'll get just as good a deal with a pre-approved auto loan but won't be out a whole bunch o' cash that may be better used in a more constructive manner. Car loans are generally cheap money with low interest rates that aren't compounded in complex ways, so unless you're flush, consider investing it or paying down more expensive debt like your mortgage or credit cards instead.
Leasing a vehicle may be an attractive option because of lower payments, but you're really paying a contracted rental fee. You're responsible for maintenance, insurance, damage and operating costs for something you don't own, and you'll need to return the car or purchase it at market value at the end of the lease. Leasing can make sense if you're a business owner as you may be able to write off the costs. You'll be able to do the same thing with a financed vehicle, but lease payments can be higher and you'll need to sell or dispose of the vehicle when its useful life has expired. Leasing allows you to upgrade vehicles every few years, but you'll be stuck with a perpetual car payment.
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