Financing or Leasing a Car

Before You Buy or Lease a Car

• Get a copy of your credit report before you visit the dealership. Visit www.AnnualCreditReport.com or call 1-877-322-8228 to get a free copy. Your credit report has information that affects whether you can get a loan — and how much you’ll have to pay in interest to borrow money.

• Get an “out-the-door” price of the car in writing before you visit the lot, and before you talk financing with the dealer. That means getting the dealer to send you the total price of the car, before financing, including taxes and fees. Having this info in writing before you go to the lot will help you compare offers from different dealers on an apples-to-apples basis, more easily catch extra charges and add-ons that may slip into your deal, and keep your attention on the total cost (not just the monthly payment).

• Know your total cost, not just the monthly payment. Low monthly payment offers can be tempting, but don’t focus solely on your monthly payment. For example, lower monthly loan payments often require longer terms and higher interest rates, which will substantially increase your overall cost. When calculating what you can afford, use the Make a Budget worksheet as a guide to make sure you have enough income to cover your monthly expenses and a car payment.

• Consider saving for a down payment first. A down payment reduces the amount you need to finance or lease. That will lower your total financing or leasing costs.

• Ask if you’ll need a co-signer. If you don’t have a strong credit history, you may need a co-signer on the finance contract or lease agreement. Co-signers assume equal responsibility for the contract. If you can’t pay what you owe, your co-signer will be on the hook. Any late payments will hurt your credit — and your co-signer’s credit.

Factoring in a Trade-in

• Research the trade-in value of your old car. Check the National Automobile Dealers Association's (NADA) Guides, Edmunds, and Kelley Blue Book. This information may help you get a better price from the dealer.

• Wait to discuss the possibility of a trade-in until after you’ve negotiated the best possible price for your new car. You want to be sure the seller doesn’t adjust the sales price of the car to make up for a generous trade-in offer.

• Know what you owe. If you still owe money on your car, trading it in might not help much. If you owe more than the car is worth, that’s called negative equity. If you want to use the car for a trade-in, ask how the negative equity will affect your new financing or lease agreement. For example, it may increase the amount you are borrowing, the length of your financing agreement, or the amount of your monthly payment.

Financing a Car

You have two financing options: direct lending or dealership financing.

Direct lending means you’re borrowing money from a bank, finance company, or credit union. In a loan, you agree to pay the amount financed, plus a finance charge, over a certain period of time. Once you’re ready to buy a car from a dealer, you use this loan to pay it.

With direct lending, you can

• Get your credit terms in advance. By getting pre-approved for financing before you shop for a car, you know the terms, including the annual percentage rate (APR), length of the loan (number of months), and maximum amount you can borrow. Use this information to negotiate with the dealer. The APR is the cost of credit on a yearly basis. It’s based on several things, including your credit rating, the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your loan.

• Comparison shop among dealers. With a pre-approval in hand, it’s easier to ask dealers for a written “out-the-door” price on a car you may be interested in (that’s the total price of the car, before financing, including taxes and fees). The price helps you identify and negotiate the best deal on the purchase and the financing without having to spend time in the dealership.

Dealership financing means you’re applying for financing through the dealership. You and the dealer enter into a contract where you buy a car and agree to pay, over a period of time, the amount financed plus a finance charge. The dealer typically sells the contract to a bank, finance company, or credit union that will service the account and collect your payments.

Dealership financing may offer you

• Multiple financing options. The dealer’s relationships with a variety of banks and finance companies may mean it can offer you a range of financing choices. Keep in mind, however, that the dealer typically profits from offering financing and may not always offer you the best deal.

• Special programs. Dealers sometimes offer manufacturer-sponsored, low-rate or incentive programs. They may be limited to certain cars or have special requirements, like a larger down payment or shorter contract length. These programs also might require a strong credit rating. Check to see if you qualify.

Shop for the Best Financing Deal

Compare financing offers from several creditors and the dealer. Remember, don’t focus only on the monthly payment — the total amount you’ll pay depends on the negotiated price of the car, the APR, and the length of the loan.

Many creditors offer longer-term loans, like 72 or 84 months. While these loans can lower your monthly payments, they may have high rates. And the longer the length of the loan, the more expensive the deal will be overall. Cars quickly lose value once you drive off the lot, so with longer-term financing, you could end up owing more than the car is worth.

Some dealers and lenders may ask you to buy credit insurance that will pay off the loan if you die or become disabled. Before you buy, consider the cost and whether it’s worth it. Check your existing insurance policies to avoid duplicating benefits. Credit insurance is not required by federal law. In fact, it’s against the law for a lender to deceptively include credit insurance in your loan without your knowledge or permission. If your dealer requires you to buy credit insurance for car financing, it must be included in the APR.

Make sure you ask the dealer about

• Auto add-ons. Add-ons are not free. They’re extra things you buy and finance along with the car. Common add-ons include gap policies, window etching, and extended warranties and service contracts. It’s ok to say no to add-ons, and to ask the price. It’s not ok for dealers to tuck add-ons into your deal or lie about them. Know exactly what you are buying and protect yourself. Ask the dealer to list the price of any proposed add-on before you visit the dealership. If you’re financing, you’ll want to know how much it costs over the life of the loan. Ask about any limits or conditions the add-ons may have. They might not cover what you expect. If you don’t want or need it, say no.

• Manufacturer incentives. Your dealer may offer manufacturer incentives, like lower finance rates or cash back on certain makes or models. Make sure you ask your dealer if the model you’re interested in has any special financing offers. Generally, these discounted rates aren’t negotiable and may be limited by your credit history. Get your answers from the dealer in writing.

• Rebates, discounts, or special prices. Ask ahead of time if you qualify for any available offers. Dealers that promote rebates, discounts, or special prices must clearly explain what’s required to qualify for them. Look closely to see if there are restrictions. For example, sometimes you have to be a recent college graduate or a member of the military, or the offers apply only to specific cars. Don’t assume that any rebates have already been included in the price or terms you’re offered. Again, you’ll want the answers to your questions in writing.

• Your annual percentage rate (APR). Negotiate the APR and the terms for payment with the dealer, just as you would negotiate the price of the car. The APR you negotiate with the dealer usually includes an amount that compensates the dealer for handling the financing. Negotiation can take place before or after the dealer accepts and processes your credit application. If you brought a pre-approved financing offer with you, be sure to compare the APR, loan term, and amount financed of the two offers to determine which is a better deal.  You might decide to stick with the financing you brought even if you’ve negotiated the dealer down.

Ask questions about the terms of the contract before you sign. For example, are the terms final and fully approved before you sign the contract and leave the dealership with the car? Does the price on your contract match what the dealer sent you ahead of time? And if the dealer says they’re still working on the approval, the deal isn’t final. Consider waiting to sign the contract, and keeping your current car, until the financing has been fully approved.

Leasing a Car

When you lease a car, you’re paying for the right to use it for an agreed amount of time and miles.

Know how leasing is different than buying. The monthly payments on a lease are usually lower than monthly finance payments if you bought the same car. With a lease, you’re paying to drive the car, not to buy it. That means you’re paying for the car’s expected depreciation — or loss of value — during the lease period, plus a rent charge, taxes, and fees. At the end of a lease, you have to return the car unless the lease agreement lets you buy it.

Figure out if leasing is right for you.

• Think about how much you drive. The annual mileage limit in most standard leases is 15,000 or less. If you want a higher limit, it will probably increase the monthly payment. That’s because the car loses value during the life of the lease. If you exceed the annual mileage limit, you’ll probably be charged an additional fee when you return the car.

• Consider all of the lease terms. When you lease, you’re responsible for excess wear and damage and any missing equipment. You also have to service the car according to the manufacturer’s recommendations, and maintain insurance that meets the leasing company’s standards. If you end the lease early, you may have to pay a substantial early termination charge.

Signing the Paperwork

Review the terms before you sign for the purchase and financing. Don’t be rushed. Ask the dealer to slow down, especially if they’re moving quickly and using an electronic process on an iPad, tablet, or other device to show you the agreement. Tell them you want to see the terms clearly before you agree, especially all the fees and charges in the deal. That way, you know the dealer didn’t include charges for any extra items you don’t want. Carefully compare what you are seeing at signing to what the dealer sent you beforehand.

Don’t leave the dealership without a signed copy of the completed credit contract or lease agreement. Make sure you understand whether the deal is final before you leave in your new (or new-to-you) car. If you’re called back to the dealership because the financing wasn’t final or didn’t go through, carefully review any changes or new documents you’re asked to sign. Consider whether you want to proceed.

• If you don’t want to agree to the new deal, tell the dealer you want to cancel and ask for your down payment and trade-in back. Make sure the application and contract have been canceled. Get confirmation in writing that the application and contact were canceled. If the loan was being arranged by a financing company, call that financing company to confirm. Keep copies of your paperwork.

• If you agree to a new deal, be sure you have a copy of all the documents.

After You Get the Car

If you financed the car, understand

• The creditor has a lien on the car’s title (and in some cases holds the actual title) until you’ve paid the contract in full.

• Late or missed payments can have serious consequences. Late fees, repossession, and negative entries on your credit report can make it harder to get credit in the future. Some dealers may put tracking devices on a car, which helps them find the car if they have to repossess it. Ask the dealer if it plans to put a device on your car as part of the sale, what the device will be used for, and what to do if the device sets off an alarm.

For More Information

Learn more about buying and owning a car at ftc.gov/cars.