How to Finance Your New Car

Every year, millions of Americans decide that their old car has to be replaced. Whether the reason is wear and tear, need for a larger vehicle or that you just want something new and snazzy, you’ll inevitably have to hear a salesman or two ask you, “How would you like to pay for the car?”

Choosing between cash, financing or leasing can be tricky, so we’ve prepared a brief primer to help you out:

1. Initial payment. For many people, a typical 10% or 20% down payment can be very intimidating. Of course, the larger the down payment, the lower the monthly costs. Also, the more you put down, the more you can haggle about the interest rate on the loan. The least expensive option, at least initially, is to lease. Many dealerships will allow you to roll the down payment into the loan. Of course, that raises the monthly fee. The most expensive option is to pay cash.

2. Monthly payments. Again, leases will usually give you the lowest monthly cost. But that’s not as good as it sounds, because you‘re only paying off the amount the car will depreciate during the life of the lease. With regular financing, you’re paying off the entire purchase price. If you’ve opted for a cash purchase, you have no monthly payments - unless you cleverly borrowed the price of the car from another source (like a home equity line.) This ploy lets you avoid high dealer interest rates and hidden fees, while “self-financing” at a much cheaper rate.

3. Equity. This refers to the amount of value you’re left with after the lease or finance agreement is finished. When you finish paying off a 36-month auto loan, you end up with about 50% of the original purchase value. So your $30,000 ride can be sold for $15,000 or used as a trade-in. In contrast, when you finish paying off a 36-month auto lease, you’re left with nothing. So, from the vantage point of equity, leasing is the most expensive way to buy a car. Equity loss is most unfair to the cash purchaser, since the bulk of a car’s depreciation comes in the first two years of ownership.

4. Tax savings. Our friends at the IRS offer substantial tax benefits when you lease a car. In addition to deducting the interest portion of the lease payment, Uncle Sam lets you add the car’s yearly depreciation to the tax break. It’s not such good news for people who take conventional financing: there are no deductions permitted for your interest payments. Of course, the taxes of cash buyers are unaffected.

5. The “New Car” factor. They’re shiny and cool and they’ve got that great smell - there’s nothing like a new car. There’s also nothing like the bite they take out of your wallet. Before you worry about how to finance it, ask yourself if you really need a new car. Does the car have to be brand new? Many financial experts recommend buying a “New Used” automobile. If you can find a slightly-used, low mileage, well-conditioned car with a couple of years of warranty remaining, you’ve made the best all-around deal. But, of course, if you’ve gotten the scent of a sharp, new roadster, and you just have to have it, finance wisely.

No matter how you decide to finance your new vehicle, you can rest assured knowing that you have options when it comes to your car insurance. The purchase of a new car and the sale of an old one can all affect your policy, so let NetQuote help! We can connect you with multiple agents who can help you get the coverage you need at the price you want.