Once you’ve finished your research, shopping, test driving and have finally decided on which new or pre-owned vehicle you will buy, the next step is to decide how you will pay.
Most vehicle purchases are financed by some means. There are two main ways to finance your vehicle: purchase financing and leasing. Both options have pros and cons. It’s important to understand both before deciding which is best in your situation.
When you purchase finance a vehicle, you are committing to a loan for the total cost of the vehicle along with all fees, taxes and interest charges. The finance terms are usually between 48 and 84 months although terms of over 96 months have become available in recent years. The terms have increased as people look to lower individual payments on more expensive vehicles.
Your dealership will set up the loan for you, either through a bank or the manufacturer’s finance arm, depending on where they can secure the best financing.
Since no one lends money for free, it’s important to note that subvented rates, like zero per cent on new vehicles, are just another form of discount. The manufacturer is covering the interest rather than discounting the vehicle more than it may already have. In fact, sometimes when a subvented rate is offered there is a cash discount alternative if you pay cash or finance though a bank or other source.
Rates on vehicle loans can vary considerable depending on your personal credit. If you’ve had some bad luck or made some bad decisions that have affected your credit, expect to pay a much higher rate.
Purchase financing may be a good choice if you don’t expect your needs to change or plan on owning the vehicle for a long time. The down side is that you are committing to the full term of the loan and may not be able to trade when you want to. You can minimize this risk by putting a down payment on the loan at the beginning.
The other way to finance a vehicle is to lease.
When you lease, you are committing to making payments that will pay down the vehicle from the selling price, to an agreed upon future value. Basically you are only financing the depreciation of the vehicle over the selected term.
At the end of the lease you have a choice to make. You can keep the vehicle and buy it for the agreed upon future value, trade in the vehicle, or simple walk away. Lease terms are usually between 24 and 48 months although 60 month leases have become available in recent years.
Leasing is a good choice if you like to drive a newer vehicle all the time or think your vehicle needs may change. There may also be tax benefits to leasing.
The downside to leasing is that your mileage is generally limited to whatever kilometers you set it up for at the beginning. Purchasing additional kilometers in a lease can make your payment substantially higher. If you have an unexpected increase in kilometres then leasing can become very costly. Excessive wear and tear or damage must be paid for before lease end if you’re not going to keep the vehicle.
Most dealerships will offer you a side by side comparison of purchase financing and leasing.
The last way to pay for your vehicle is by paying cash. This may be the right option for you if you have the money and would like to avoid interest charges. As mentioned earlier, paying cash may offer you an additional discount on the vehicle.
If you want to see what all the potential discounts and rates are before visiting the dealership check the manufacturer’s website. Most have a build-and-price function that will provide all this information on the specific vehicle you are interested in.
There are almost no good reason to use a line of credit to acquire a vehicle. Buying a deprecating asset with an interest-only loan is probably not a prudent choice. People often do it and only pay the interest. They don’t pay down the loan, so it never gets paid off.
Sit down with a car person you trust and go over your personal situation. Try to match your financing cycle to your trading cycle. Go over the numbers involved with all three options and talk it out until you’re comfortable proceeding with the method that seems to work best for your personal situation.
Catch Driving, with Jens on CHON FM Thursdays at 8:15. If you have any questions or comments you can reach out to Jens Nielsen at firstname.lastname@example.org, Facebook or Twitter: @drivingwithjens.