Financing or Leasing a Car: How to Compare Offers and Keep the Total Cost Down

Most people do not pay cash for a car.

They finance it with a loan or lease it for a few years.

Either way, the paperwork decides how much the car really costs you.

Two drivers can buy the same car at the same price and still pay very different totals.

The difference comes from the interest rate, the length of the loan and the extras added at signing.

This guide follows the advice in the Federal Trade Commission's Financing or Leasing a Car guide.

It covers what to do before you visit the dealer, how to compare offers and what to check before you sign.

Before you shop: three things to know

Good car deals start at home, before anyone is trying to sell you something.

Know these three things before you step onto the lot.

  • Your credit report. It affects whether you get a loan and how much interest you pay. The FTC points to AnnualCreditReport.com for a free copy.
  • The out-the-door price. Ask the dealer to send the total price of the car in writing, including taxes and fees, before financing.
  • Your budget. Work out what you can pay each month after rent, food, insurance and other bills.

The written out-the-door price is especially useful.

It lets you compare dealers on equal terms.

It also makes surprise charges much easier to catch later.

Watch the total cost, not the monthly payment

A low monthly payment is the most tempting number in any car ad.

It is also the easiest number to bend.

The FTC warns that lower payments often come with longer terms and higher interest rates.

Together, those two things can raise the total amount you pay by a lot.

Many lenders now offer loans of 72 or 84 months.

The monthly payment drops, but the deal becomes more expensive overall.

There is a second risk with long loans.

Cars lose value quickly once you drive off the lot.

With a long loan, you could owe more than the car is worth for years.

That gap is called negative equity, and it makes your next trade-in harder.

A down payment helps on both fronts.

It reduces the amount you finance, so it lowers the total cost of the loan or lease.

Direct lending or dealer financing?

You have two main ways to finance a car.

Direct lending

With direct lending, you borrow from a bank, credit union or finance company.

You then use that loan to pay the dealer.

The big advantage is getting pre-approved before you shop.

You know the annual percentage rate, the loan length and the maximum amount in advance.

The annual percentage rate, or APR, is the yearly cost of credit.

It depends on your credit rating, the amount you borrow, the interest rate and the length of the loan.

With a pre-approval in hand, you can negotiate the price with a clear budget.

Dealer financing

With dealer financing, you sign a contract with the dealer.

The dealer usually sells that contract to a bank, finance company or credit union.

That company then collects your payments.

Dealers can offer several lenders at once and sometimes special manufacturer programs.

Those programs may require strong credit, a larger down payment or a shorter contract.

Keep in mind that the dealer typically profits from arranging the financing.

The APR it offers usually includes an amount that pays the dealer for handling the loan.

You can negotiate the APR, just as you negotiate the price of the car.

Compare the offers side by side

If you bring a pre-approved offer, compare it line by line with the dealer's offer.

  • The APR
  • The length of the loan in months
  • The amount financed
  • The total you will pay over the life of the loan

You may decide to keep your own financing even after the dealer lowers its rate.

Trade-ins: agree on the price first

If you plan to trade in your current car, research its value first.

The FTC mentions pricing guides such as Kelley Blue Book, Edmunds and the NADA Guides.

Wait to bring up the trade-in until you agree on the price of the new car.

Otherwise, a generous trade-in offer can be quietly offset by a higher sale price.

Also know how much you still owe on your current loan.

If you owe more than the car is worth, ask how that balance will be handled.

Rolling it into the new deal can raise the amount you borrow, the loan length or the payment.

Add-ons: it is fine to say no

Add-ons are extra products sold and financed along with the car.

Common ones include gap coverage, window etching, extended warranties and service contracts.

None of them are free, and financing them adds interest on top of their price.

The FTC says it is fine to ask the price of an add-on and to say no.

It is not acceptable for a dealer to tuck add-ons into the deal or lie about them.

Ask the dealer to list the price of any proposed add-on before your visit.

Ask what it covers and what limits or conditions apply.

The FTC also has a guide to auto warranties and service contracts, the most common add-on.

Credit insurance deserves its own warning.

It pays off the loan if you die or become disabled.

Federal law does not require it.

A lender may not include it in your loan without your knowledge or permission.

If a dealer requires it for financing, its cost must be included in the APR.

Rebates and special prices often come with conditions too.

Some apply only to recent college graduates, military members or certain models.

Do not assume a rebate is already in the price, and get the answers in writing.

Is leasing a better fit?

A lease is a contract to use the car for a set time and number of miles.

You pay for the car's expected loss of value during the lease, plus a rent charge, taxes and fees.

That is why lease payments are usually lower than loan payments on the same car.

At the end, you return the car unless the contract lets you buy it.

Leasing works best for drivers whose habits match the contract.

  • Mileage: most standard leases allow 15,000 miles a year or less. Extra miles usually mean a fee at return.
  • Wear and damage: you pay for excess wear, damage and missing equipment.
  • Maintenance: you must service the car as the manufacturer recommends.
  • Insurance: you must carry coverage that meets the leasing company's standards.
  • Ending early: breaking a lease can bring a large early termination charge.

If you drive a lot or keep cars for many years, buying is often the simpler choice.

Signing day: slow down

The last hour at the dealership is where many mistakes happen.

You are tired, the car is ready, and the papers move fast on a tablet screen.

The FTC's advice is simple: do not be rushed.

  • Ask the dealer to slow down and show each term clearly.
  • Compare the contract with the out-the-door price you received earlier.
  • Look for fees or add-ons you did not agree to.
  • Ask whether the financing is final and fully approved.
  • Leave with a signed copy of the completed contract or lease.

If the dealer says the approval is still in progress, the deal is not final.

Consider waiting to sign, and keeping your current car, until the financing is approved.

Sometimes a buyer is called back because the financing did not go through.

In that case, review any changes or new documents carefully before signing again.

If you do not want the new terms, you can cancel and ask for your down payment and trade-in back.

Get the cancellation in writing and keep copies of all your paperwork.

After you drive away

Until the loan is paid in full, the lender has a lien on the car's title.

Late or missed payments can lead to fees, repossession and damage to your credit.

Some dealers install tracking devices that help them find a car if they repossess it.

Ask whether the dealer plans to install one and what it will be used for.

A car loan lasts for years, long after the new-car smell is gone.

A few careful hours before signing can save money on every one of those payments.

Sources and Further Reading