Purchase Options Overview
To make sure you are comfortable paying for your vehicle, it's essential to understand which scenario—leasing or purchasing—is right for you.
Leasing a Vehicle
When you lease a vehicle, you don't pay for 100 percent of the vehicle; you just pay for the portion of the vehicle's value that's used over the term of the lease plus rent charge, taxes and fees. Unlike purchasing a vehicle, you never own the vehicle when leasing.
Pros of Leasing
- Generally, your base monthly payments are lower than if you purchased the vehicle
- You have the option of purchasing the vehicle at the end of the lease
- There are no trade-in hassles at the end of the lease
- You may be eligible for special deals or discounts
Cons of Leasing
- There are mileage limits, typically 10,000 to 15,000 miles per year. If you exceed the limit, you may pay an additional charge for each mile you go over the limit
- You may be charged excess wear and use charges
- Since you don't own the vehicle, you don't build equity
- You may be charged an acquisition fee
- You may be charged a disposition fee
- If your driving needs change, it can be expensive to terminate a lease early
Financing
When you finance a vehicle purchase, you obtain a loan and agree to pay the amount you borrow, plus an agreed-upon finance charge, over a period of a time.
Pros of Financing
- You will eventually own the vehicle
- There are no mileage limits
- Submitting your payments on time may help you establish a good credit history
- Financing helps you purchase a vehicle
Cons of Financing
- Depending on the term, finance payments are generally higher than lease payments
- Resale value of the vehicle can be significantly lower than the purchase price at the end of your term
Understanding Vehicle Financing
Financing a vehicle is a serious commitment. Learn about how the process works before signing on the dotted line.
Before You Visit the Dealership
- Determine how much you can afford
- Check third-party buying guides and websites to determine the price range of the vehicle you want to purchase
- Get a copy of your credit report so you know what potential lenders will see. It's also a good opportunity to correct any errors or inaccurate information. You can get a copy of your credit report by contacting one of the three major credit bureaus: Equifax Credit Information Services, Experian or TransUnion Corporation
Applying for Financing at the Dealership
Most dealerships have a Finance and Insurance (F&I) Department, which provides one-stop shopping for financing. The F&I Department will ask you to complete a credit application, which will ask for the following information:
- Your name
- Social Security number
- Date of birth
- Current and previous addresses and length of residence
- Current and previous employers and length of employment
- Occupation
- Sources of income
- Totally gross monthly income
- Financial information on existing credit accounts
Once you've completed the credit application, the dealership will obtain a copy of your credit report, which contains information about current and past credit obligations, your payment record and data from public records (for example, a bankruptcy filing obtained from court documents).
Approval Process
Typically, dealers sell your contract to an assignee, such as a bank, finance company or credit union. The dealership submits your credit application to one or more of these potential assignees to determine their willingness to purchase your contract from the dealer.
These finance companies or other potential assignees will usually evaluate your credit application using automated techniques such as credit scoring, where a variety of factors, like your credit history, length of employment, income and expenses may be weighted and scored.
Each finance company or other potential assignee decides whether it is willing to buy the contract and notifies the dealership of its decision.
Special Offers
Make sure you ask your dealer if the vehicle you are interested in has any special financing offers or rebates. Generally, these discounted rates are not negotiable, may be limited by your credit history and are available only for certain models, makes or model-year vehicles.
APR
Your credit history, current finance rates, competition, market conditions and special offers are among the factors that influence your annual percentage rate (APR).
When there are no special financing offers available, you can negotiate the APR and the terms for payment with the dealership, just as you negotiate the price of the vehicle. This negotiation can occur before or after the dealership accepts and processes your credit application.
Purchase Financing Checklist
Here's a list of questions to review when securing your vehicle financing:
- What is my annual percentage rate APR?
- Can I receive a lower APR if I make payments using electronic funds transfers?
- What is the exact price I am paying for the vehicle?
- What is the specific amount of each monthly payment?
- Is my down payment at least 10% of my total vehicle cost?
- What is the total cost, in dollars, my purchase on credit, including financing costs and my down payment?
- Do I incur any penalties if I pay off early?
- What is the total number of payments?
Guide to Leasing a Vehicle
Leasing is a financing option that can provide lower monthly payments and a brand-new vehicle every few years. Learn how leasing works and find out if it is the right choice for you.
Leasing Basics
When you lease, you do not pay for 100 percent of the vehicle, you simply pay for a portion of the vehicle's value that you will use over the term of the lease, plus rent charge, taxes and fees.
Three factors determine monthly lease payments: vehicle price, the vehicle's value at the end of the lease and the lease charges.
For the most part, lease terms range between 24 and 48 months, though you can find leases from anywhere between 12 and 72 months. When selecting a lease term, keep in mind that if you terminate your lease early, even to buy the vehicle, you will need to pay off the lease and cover all expenses and penalties.
Today, many leases are closed-end leases. This means the vehicle's residual value is pre-set and at normal lease termination you may have no liability if the vehicle is worth less than the residual value.
Negotiate Lease-end Items
- Familiarize yourself with the charges you will pay for extra-mileage. Clarify what constitutes normal "wear and use."
- If you believe you will need extra miles, protect yourself from additional expenses at your lease-end and purchase extra miles up front at a reduced rate. If you do purchase the extra miles, make sure you get a rebate at the end of the lease for pre-purchased mileage you do not use.
Lease Advice
- Negotiate a lease as you would the purchase of a vehicle. Before negotiating other parts of the lease, negotiate the cost of the vehicle.
- Ensure that the vehicle's lease-end value or other capitalized cost reductions are stated on the contract and reflected in the payment.
- Think about the number of years you normally keep a vehicle; this is a good indicator of the lease length you need.
Rebates and Financing Incentives
Rebates and financing incentives are price reductions designed to boost sales on new models, or to lower excess inventory of older models. They are usually given on particular models for a specified time period.
Rebates
Rebates are generally offered in cash. More expensive vehicles will usually garner higher cash rebates. Often, cash back rebates are advertised on TV and radio, but to make sure you have the latest information, always check with the dealer and third-party sites.
Financing Incentives
A financing incentive is a loan with a reduced annual percentage rate (APR).
Some rebates and financing incentives are offered to specific groups of buyers, rather than by vehicle choice. For example, financing incentives may be offered to first-time buyers, repeat buyers and college graduates. Financing incentives may also apply to leases.
Our Financing Incentives
Find out if you qualify for a rebate or financing incentive with one of our Discount Buying Programs. Those who may qualify include college students, members of the military, youth-driver-education providers, diplomats, expatriates and people with special mobility needs.
Choosing Between Rebates and Financing Incentives
If both a rebate and financing incentive are offered, the buyer must typically choose one or the other, so be prepared to compare numbers.
Choosing between the rebate and financing incentive depends on several factors, including your credit record, the size of your optimal monthly payment, and the amount of time you're willing to wait for your savings.
Compare Rebates and Financing Incentives
To compare rebates and financing incentives, you will need to perform a few calculations.
- Using an APR you select, determine the amount you'll pay for financing over the contract and add this to the cost of the vehicle plus other amounts you finance. Once you've determined your total cost, subtract the cash back. This is Price A.
- Using the incentive APR financing number, determining the amount you'll pay for financing over the contract and add this to the cost of the vehicle plus other amounts you finance. This is Price B.
- Take the lower of Price A and Price B.
Rebates and Financing Incentives Advice
- If you want to make a large down payment to lower your monthly payment, take the cash back rebate.
- Research third-party websites and find out if your desired model is being redesigned. Rebates and financing Incentives may be higher right before a redesign is released.
- As dealerships prefer to keep vehicles moving quickly through their showrooms, you could secure a rebate or financing incentive if the vehicle has been around for six months or longer. Look for the date the vehicle was manufactured on the inside of the driver's side door. If the vehicle was manufactured more than six months ago, you should ask for a rebate or financing incentive.
- Keep in mind that qualifying for certain financing incentives may require a good credit rating.
- Depending on which state you live in, if you sign a rebate over to the dealer, you may not have to pay sales tax on that amount.
- Remember that rebates and financing incentives have expiration dates.
