Financing or Leasing a Car

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.

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:

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:

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.

You have two financing options: direct lending or dealership financing.

Direct Lending

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.

Dealership Financing

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.

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.

Sample Comparison

Consider the total costs of financing the car, not just the monthly payment. It is important to compare different payment plans for both the monthly payment and total of payments required, for example, for a 48-month/4-year and a 60-month/5-year credit purchase. In general, longer contract lengths mean lower monthly payments, higher total finance charges, and higher overall costs. Be sure you will have enough income available to make the monthly payment throughout the life of the finance contract. You also will need to account for the cost of insurance, which may vary depending on the type of car you buy, and other factors.

* Note: All dollars have been rounded. The numbers in this sample are for example purposes only. Actual finance terms will depend on many factors, including your credit rating.

Your Own Comparison

* Note: You are not required to buy items that are optional. If you do not want these items, tell the dealer and do not sign for them. Be sure they are not included in the monthly payments or elsewhere on a contract that you sign.

Most dealerships have a Finance and Insurance (F&I) Department that will tell you about its available financing options. The F&I Department manager will ask you to complete a credit application, which may include your:

• name
• Social Security number
• date of birth
• current and previous address(es) and length of stay
• current and previous employer(s) and length of employment
• occupation
• sources of income
• total gross monthly income
• financial information on current credit accounts, including debt obligations

Most dealerships will get a copy of your credit report, which has information about your current and past credit, your payment record, and data from public records (like a bankruptcy filing from court documents). It may also include your credit score.

Make sure to ask the dealer about:

• Manufacturer incentives. Your dealer may offer manufacturer incentives, such as reduced finance rates or cash back on certain makes or models. Make sure you ask your dealer if the model you are interested in has any special financing offers. Generally, these discounted rates are not negotiable and may be limited by your credit history.
• Rebates, discounts or special prices. Ask if you qualify for any available rebates, discounts or offers, as they can reduce your price and, therefore, the amount you finance or that is part of your lease. Dealers who promote rebates, discounts or special prices must clearly explain what is required to qualify for these incentives. Look closely to see if there are restrictions on these special offers. For example, these offers may involve being a recent college graduate or a member of the military, or they may apply only to specific cars. Don’t assume that the rebates have already been included in the price or terms you are offered.
• Your Annual Percentage Rate (APR). When no special financing offers are available, you usually can negotiate the APR and the terms for payment with the dealership, just as you would negotiate the price of the car. The APR that you negotiate with the dealer usually includes an amount that compensates the dealer for handling the financing. The APR will vary depending on your credit rating. Negotiation can take place before or after the dealership accepts and processes your credit application. Try to negotiate the lowest APR with the dealer, just as you would negotiate the best price for the car.

Ask questions about the terms of the contract before you sign. For example, are the terms final and fully approved before you sign the contract and leave the dealership with the car? If the dealer says they are still working on the approval, the deal is not yet final. Consider waiting to sign the contract and keeping your current car until the financing has been fully approved. Or check other financing sources before you sign the financing and before you leave your car at the dealership. Also, if you are a military service member, find out if the credit contract lets you move your car out of the country. Some credit contracts may not.

When you lease a car, you have the right to use it for an agreed number of months and miles.

How is leasing different than buying? The monthly payments on a lease usually are lower than monthly finance payments if you bought the same car. You are paying to drive the car, not buy it. That means you’re paying for the car’s expected depreciation during the lease period, plus a rent charge, taxes, and fees. But at the end of a lease, you must return the car unless the lease agreement lets you buy it.

To figure out if leasing fits your situation:

• Consider the beginning, middle and end of lease costs
• Consider how long you may want to keep the car
• Compare different lease offers and terms, including mileage limits

Think about how much you drive. The mileage limit in most standard leases is typically 15,000 or fewer per year. You can negotiate a higher mileage limit, but that normally increases the monthly payment, because the car depreciates more during the life of the lease. If you go beyond the mileage limit in the lease agreement, you probably will have to pay an additional charge when you return the car.

Consider all of the lease terms. When you lease, you are responsible for excess wear and damage and any missing equipment. You also must service the car according to the manufacturer’s recommendations and maintain insurance that meets the leasing company’s standards. If you end the lease early, you often have to pay an early termination charge that could be substantial.

Might you move during the lease period? Some leases may not let you move the car out of state or out of the country. Find out the rules for the deal you are considering.

Are you a service member who leased a car? Federal law lets you terminate the lease with no early termination charges IF:

• you leased before you went into military service and then went on active duty for at least 180 days, or
• you leased a car during military service and then got a permanent change of duty station outside the continental U.S., or got deployment orders for at least 180 days.

Other fees may still apply, including those for excess wear, use, and mileage.

For more information, see Keys to Vehicle Leasing, a publication of the Federal Reserve Board.

Be sure you have a copy of the credit contract or lease agreement, with all signatures and terms filled in, before you leave the dealership. Do not agree to get the papers later because the documents may get misplaced or lost.

If you financed the car, understand:

• The creditor has a lien on the car’s title (and in some cases holds the actual title) until you have paid the contract in full.
• Make your payments on time. Late or missed payments can have serious consequences: late fees, repossession, and negative entries on your credit report can make it harder to get credit in the future. Some dealers may place tracking devices on a car, which might help them locate the car to repossess it if you miss payments or pay late. Find out if the dealer expects to place the device on your car as part of the sale, what it will be used for, and what to do if the device sets off an alarm.

Were you called back to the dealership because the financing was not final or did not go through? Carefully review any changes or new documents you’re asked to sign. Consider whether you want to proceed. You do not have to continue with the financing. If you don’t want the new deal being offered, tell the dealer you want to cancel or unwind the deal and you want your down payment back. If you do unwind the deal, be sure the application and contract documents have been cancelled. If you agree to a new deal, be sure you have a copy of all the documents.

If you will be late with a payment, contact your creditor right away. Many creditors work with people they believe will be able to pay soon, even if slightly late. You can ask for a delay in your payment or a revised schedule of payments. Sometimes, the creditor might agree to change your original contract. If they do, get it in writing to avoid questions later.

If you are late with your car payments or, in some states, if you do not have the required auto insurance, your car could be repossessed. The creditor may repossess the car or may sell the car and apply the proceeds from the sale to the outstanding balance on your credit agreement. If the car is sold for less than what you owe, you may be responsible for the difference.

In some states, the law allows the creditor to repossess your car without going to court.

For more information, including definitions of common terms used when financing or leasing a car, read “Understanding Vehicle Financing,” jointly prepared by the American Financial Services Association Education Foundation, the National Automobile Dealers Association, and the FTC. To order print copies of “Understanding Vehicle Financing,” call the AFSA Education Foundation: (888) 400-7577.