Things To Consider When Buying A Car

Here are some things to think about the next time you buy a car.

What About a Co-Signer?

You may be required by the creditor to have a co-signer sign the finance contract with you in order to make up for any deficiencies in your credit history. A co-signer assumes equal responsibility for the contract, and the account history will be reflected on the co-signer’s credit history as well. For this reason, you should exercise caution if asked to co-sign for someone else. Since many co-signers are eventually asked to repay the obligation, be sure you can afford to do so before agreeing to be someone’s co-signer.

Should I Lease a Vehicle?

If you are considering leasing, there are several things to keep in mind. The monthly payments on a lease are usually lower than monthly finance payments on the same vehicle because you are paying for the vehicle’s expected depreciation during the lease term, plus a rent charge, taxes, and fees. But at the end of a lease, you must return the vehicle unless the lease lets you buy it and you agree to the purchase costs and terms. To be sure the lease terms fit your situation: Consider the beginning, middle and end of lease costs. Compare different lease offers and terms, including mileage limits, and also consider how long you may want to keep the vehicle.

When you lease a vehicle, you have the right to use it for an agreed number of months and miles. At lease end, you may return the vehicle, pay any end-of-lease fees and charges, and “walk away.” You may buy the vehicle for the additional agreed-upon price if you have a purchase option, which is a typical provision in retail lease contracts. Keep in mind that in most cases, you will be responsible for an early termination charge if you end the lease early. That charge could be substantial.

Another important consideration is the mileage limit – most standard leases are calculated based on a specified number of miles you can drive, typically 15,000 or fewer per year. You can negotiate a higher mileage limit, but you will normally have an increased monthly payment since the vehicle’s depreciation will be greater during your lease term. If you exceed the mileage limit set in the lease agreement, you’ll probably have to pay additional charges when you return the vehicle.

When you lease, you are also responsible for excess wear and damage, and missing equipment. You must also service the vehicle in accordance with the manufacturer’s recommendations.

Finally, you will have to maintain insurance that meets the leasing company’s standards. Be sure to find out the cost of this insurance.

Determining How Much You Can Afford

Before financing or leasing a vehicle, make sure you have enough income to cover your current monthly living expenses. Then, finance new purchases only when you can afford to take on a new monthly payment. The “Monthly Spending Plan” is a tool to help determine an affordable payment for you.

The only time to consider taking on additional debt is when you’re spending less each month than you take home. The additional debt load should not cut into the amount you’ve committed to saving for emergencies and other top priorities or life goals. Saving money for a down payment or trading in a vehicle can reduce the amount you need to finance. In some cases, your trade-in vehicle will take care of the down payment on your vehicle.

"Monthly Spending Plan" and "Shop for the Best Deal" Worksheets [PDF only 409k]

Sample Comparison
This example will help you compare the difference in the monthly payment amount and the total payment amount for a 3-year and a 5-year credit transaction. Generally, longer terms mean lower monthly payments and higher finance charges. Make sure you have enough income available to make the monthly payment by reviewing your monthly spending plan. You’ll also need to factor in the cost of car insurance, which may vary depending upon the type of vehicle.

Note: All dollars have been rounded for this illustration. The numbers in this sample are for example purposes only. Actual finance terms may be different and will depend on many factors, including your credit worthiness.

3 years (36 months) 5 years (60 months)

Amount Financed $ 20,000 - $ 20,000
Contract Rate (APR) 8.00% - 8.00%
Finance Charges $ 2,562 - $ 4,332
Monthly Payment Amount $ 627 - $ 406
Total of Payments $ 22,562 - $ 24,332
Down Payment 10% - 10%

Know the Terms of Financing Before You Sign

Negotiated Price of the Vehicle – The purchase price of the vehicle agreed upon by the buyer and the dealer.

Down Payment – An initial amount paid to reduce the amount financed.

Extended Service Contract – Optional protection on specified mechanical and electrical components of the vehicle available for purchase to supplement any warranty coverage provided with the new or used vehicle.

Credit Insurance – Optional insurance that pays the scheduled unpaid balance if you die or scheduled monthly payments if you become disabled. As with most contract terms, the cost of optional credit insurance must be disclosed in writing, and, if you want it, you must agree to it and sign for it.

Guaranteed Auto Protection (GAP) – Optional protection that pays the difference between the amount you owe on your vehicle and the amount you receive from your insurance company if the vehicle is stolen or destroyed before you have satisfied your credit obligation.

Amount Financed – The dollar amount of the credit that is provided to you.

Annual Percentage Rate or “APR” – The cost of credit expressed as a percentage.

Finance Charge – The total dollar amount you pay to use credit.

Fixed Rate Financing – The finance rate remains the same over the life of the contract.

Variable Rate Financing – The finance rate varies and the amount you must pay changes over the life of the contract.

Monthly Payment Amount – The dollar amount due each month to repay the credit agreement.

Assignee – The bank, finance company or credit union that purchases the contract from the dealer.

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