Buying. If you must finance your automobile purchase (which is not recommended), remember that banks and credit unions will charge different interest rates than the dealer will charge. Usually, financing provided through the dealership is the most expensive type of financing, so compare interest rates on auto loans from multiple institutions before you purchase a car.

When comparing different loans, look at the term of the loan, the interest rate, and the fees. Financial institutions will typically finance newer vehicles for longer periods of time than they will finance older vehicles. Your credit score will have a major impact on the interest rate you will pay on your auto loan, so keep your credit score high. For more information on this topic, refer to the sections on Understanding Credit and Consumer and Mortgage Loans.

Calculate the overall costs of the purchase, including down payment, fees, taxes, license, documentation, and any dealer options. Know your total cost for the vehicle before you sign any sales documents so you will know how much you are paying. Realize that many of the dealer-installed options, such as rust coating, leather treatment, special rims and tires, and so on, are not required for the sale, even though the dealer may have done the work beforehand. Also, realize that nearly all costs are negotiable.

Leasing. If you decide to lease, realize that each leasing organization has different rates and programs, depending on your credit worthiness. Keep your credit score high, and find the cheapest source of financing for your vehicle.

Determine your lease term. Generally, most vehicles depreciate more in the early years of a lease than in the later years. As such, you will be paying more for newer vehicles than you will pay for older vehicles. Lease terms can be as short as twenty-four months and as long as seventy-two months. Remember that if you choose a lease term that is longer than your new vehicle’s warranty (generally three years or 36,000 miles) you will be responsible for any repairs beyond the new vehicle’s warranty period. If you are looking at a longer lease, it may be wise to get an extended warranty or a service contract to minimize the risk of additional costly repairs.

Calculate the amount of your residual value, usage or depreciation charges, interest or finance charges, taxes, and all the fees that you will be paying. It is a good idea to compare the cost of leasing versus the cost of buying over the life of the lease. For an example of how to compare the costs of leasing versus buying, see Learning Tool 22: Lease Versus Buy Analysis in the Learning Tools directory of this website.