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When youâre looking for a new car, it can be difficult to decide whether buying one outright or leasing one for a period of time makes more sense. Itâs true that cars only go down in value the longer you own them, but there are still some solid arguments for owning one outright rather than essentially renting one.
Car-related decisions can be stressful, and thereâs a lot you need to know before buying or renting, but donât worry. If youâre in the market for a new car and arenât sure which way to go, you can use the following questions to help you make the best decision for your situation.
If you only need a car for weekend adventures and plan to use public transportation or to carpool during the week, then leasing might be the better option for you, if you can get a good deal. Most lease contracts come with stipulations on how many miles you can put on the car while youâre using it, but if youâre only using it for a few quick trips each week, you likely wonât come close to hitting that mileage mark. Still, youâll want to pay close attention to that number if you do end up going for a lease. Always ask what happens if you go over the mileage count, since the penalties can be steep. On the other hand, if you have a lengthy commute to get to work and you need a reliable car to get you thereâor you just arenât interested in tracking milesâbuying might be better for you.
You probably wouldnât go into a car purchase intending to rough up the car, but stuff happens, so youâll need to decide what you plan to use your car for to know if leasing is right for you. If you lease a car, the dealer generally allows normal wear and tear upon return at the end of your lease, but youâll be charged extra if they think the car has been more weathered. Be sure to get the specifics from the dealership on what exactly they consider ânormalâ wear and tear, and if that doesnât match your plans for the carâif you plan to off-road in the Colorado Rockies on most weekends, for exampleâit might be better to buy.
One appealing thing about leasing a car is that most car leases end after three yearsâso you have the opportunity to upgrade to a new model every three years if youâd like. Of course you could buy a car and upgrade that way, but it can be harder to deal with the sale of a car than it is to just turn your lease back over to the dealer.
Most lease agreements will come with lower down payments than buyer agreements have. In some cases, if you lease a car, you may even be able to negotiate with the dealer to skip a down payment altogether. (Keep in mind, though, that this will likely result in higher monthly payments.) Either way, if you really need a car now, and you donât have the cash for a decent down payment, then going with a lease may put you in the driverâs seat faster than if you waited to buy a car.
Buying a car is a very personal decision, and whether you lease or buy will be determined by a number of factors. At the end of the day, buying a car is almost always the cheaper option if you need a car for the long term, but signing up for a short-term lease can be a solid option depending on your needs. Putting in a little bit of extra thought before searching for your next ride can ensure you make the right decision.
Whatever move you decide to make, be smart in how you approach car buying or leasing. Donât forget that having good credit will improve your car-buying experience, so before you make car-related decisions, check your credit and see where youâre at. You can always check your credit for free at Credit.com.
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Getting a new car is a big decision, and you should choose your next vehicle carefully. But if you think finding the right car is difficult, deciding whether to lease or buy can be even more overwhelming. Start the process right by understanding the minimum credit score to lease a car and determining whether this is the best decision for you.
According to Experian, companies that lease automobiles typically like to see a credit score of 700 or higher, though you might be able to get approved for some leases with a score that falls below that. In some cases, it’s easier to qualify for a lease for certain vehicles, such as those that come with a lower price tag.
Before you apply for a lease, you should check your credit report, giving yourself plenty of time to dispute and fix any negative mistakes to enhance your chance of getting approved for a lease. You can get a copy of your credit report from AnnualCreditReport.com. Usually you get one copy per year from each of the three major bureaus, but due to COVID-19, you can get one copy every week through April 2021.
You should also check your credit score to check if you have the right credit score to lease a car. This lets you know if you fall below the potential requirements for most lease companies. Sign up for ExtraCredit and get 28 of your FICO Scores plus your credit reports from all three credit bureaus so you’re armed with the right information.
Leases offer some advantages over buying. The down payment and fixed monthly payments for a lease are typically lower than the cost of financing. You get to drive a newer car, and many repair costs may be covered by the manufacturer’s warranty or the lease agreement.
However, leases also come with many limitations and the potential for additional costs. If you exceed a lease’s mileage limit, you’ll pay a fee for every additional mile. You’ll also be charged for extra wear and tear, and you aren’t allowed to modify the vehicle. If you decide the car isn’t right for you, you could pay a steep penalty for terminating your lease early.
Despite the lower monthly payment, the lifetime cost of leasing is generally much higher than buying, especially considering you don’t own your car at the end of the lease. Before you decide if a lease is right for you, make sure to understand the pros and cons of leasing.
One of the biggest advantages of leasing is that you might get a lower monthly payment compared to a car loan on the same vehicle. Leases are cheaper because you’re only paying for the depreciation of the car’s value plus interest, taxes, and fees. With a loan, you’re also paying off the entire purchase price of the vehicle.
However, these monthly costs don’t take down payments or trade-in values into account. While leases typically have lower down payments, you’ll have to turn in or buy your car when the lease is up. And you’ll have no ownership in the car to show for the few years of payments you already made. It’s important to consider whether you can afford the monthly payment now and the cost of buying or leasing a new vehicle in a few years.
Auto loans can be found at banks, credit unions, car dealers, and online. Leases, on the other hand, are largely controlled by the manufacturer. You may be able to get a better deal if you consider vehicles from different manufacturers instead of sticking to one make and model.
The manufacturer will consider your credit score to lease a car, your debt-to-income ratio, and the “lease-to-value” ratio. That’s how much you are financing compared to the vehicle’s value. If you are having trouble qualifying, you may need to put down additional money or get a cosigner for your lease.
Just as with auto loans, you can negotiate the cost of a leased car. So if you aren’t getting the deal you want, make a counter-offer or keep looking.
If you aren’t ready to commit to a lease term of two to three years, you can potentially take over the remaining term on someone else’s lease. As long as your credit is in the same tier or better than the person whose lease you are assuming, you’ll likely qualify to take over their lease. Sites like SwapALease.com and LeaseTrader.com help connect consumers who want to get out of leases and consumers who want to assume one.
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If youâd rather buy a car than lease one, weâve got some tips on how to finance a car. We can also help you find a lender to apply for a car loan.
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Buying a car is almost a rite of passage. Making that first car purchase, negotiating with the seller, and arranging financing (if you need an auto loan) all require a certain amount of savvy.
And, once you successfully achieve the car-buying milestone, another signpost looms in the distance: Refinancing.
Whether youâre getting an auto loan for the first time, or you want to refinance your existing car debt, itâs important to be an informed consumer. Hereâs what you need to know.
Before beginning your car search, you need your finances in order, according to Joe Pendergast, the vice president of consumer lending for Navy Federal Credit Union.
âKnow your budget, check your credit score, and review your existing credit accounts to ensure they are reported accurately,â Pendergast said. Your credit situation can directly impact the interest you pay on your auto loan.
Emily Shutt, a certified financial coach who works closely with millennial women to help them manage a variety of money issues, suggested calling around to different dealers and banks or credit unions to see what credit bureau they use to check your score. Then you can check your report for errors and have them fixed before you talk to someone about financing your car purchase.
âHaving errors on a credit report can negatively impact score, which can put you at a huge disadvantage when youâre negotiating for an auto loan interest rate,â Shutt said.
You should also know ahead of time where you stand with your budget. Use an online loan calculator to determine what you can afford in terms of a monthly payment. For example, if you think you can handle a $305 monthly payment, and you have the credit to get an interest rate of 2.9% for a five-year loan, you might feel you can afford to borrow up to $17,000 for a car.
Just because you might be able to borrow so much for a car doesnât mean you necessarily should. In fact, saving for a down payment makes a lot of sense, Shutt said. Not only does having a down payment help you to better negotiate your loan rate, but it also can allow you a shorter loan term and save you money in the long run.
Play around with the numbers a little with an online calculator. If you can put $7,000 down, so that you borrow only $10,000 of that $17,000 car, you could maybe get an interest rate of 2.5% and a loan term of three years. Even better, your monthly payment would only be $289 â and youâd save $1,494 in interest.
The less you borrow, the more money you have in the end. And thatâs money you can put toward investing in your future, rather than paying interest to someone else.
Once your finances are in order and maybe you have a down payment saved up, itâs time to figure out what you can actually buy. Avoid over-borrowing by knowing what you want in a car and having an idea of what it costs, Shutt suggested.
âEverything should already be online so you can get a sense of what all the options are,â said Shutt. A little research can go a long way toward helping you get a sense for which cars will fit into your budget.
Shutt pointed out that the job of salespeople is to get you to spend as much money as possible. The more you spend, the more you have to borrow â and the more youâll pay in interest. âConfidently stand your ground when a salesperson tries to upsell you or steer you in another direction,â she said.
Pendergast agreed on the need to research your car choices ahead of time. âKnow the price other dealerships in the area are offering so you can make an informed purchase,â he said.
Itâs even okay to play one sellerâs price off anotherâs to get the best deal. Donât be afraid to let the other dealerships know youâre shopping around. Theyâll be more inclined to negotiate with you, potentially resulting in a better deal.
Before you ask for dealer financing, suggested Pendergast, talk to a bank or credit union.
âYou should see what type of loans your financial institution has to offer,â said Pendergast. âThis will give you guidance for your budget, but will also increase your purchasing power to help you in negotiations, regardless of the dealerâs proposition being on par with the lenderâs.â
Donald E. Peterson, a consumer lawyer with almost 30 years of experience, warned that dealer financing still often requires the involvement of a bank or credit union. Dealers submit your information to lenders and get interest rates quotes back.
âSometimes dealers mark up the interest rate above the rate banks would buy the loan at,â Peterson said. âThe bank and the car dealer split the excess interest, usually 50-50.â
This practice isnât just limited to banks, either. âSome credit unions have entered into interest-rate kickback agreements with car dealerships,â Peterson said. âYou must apply to the credit union yourself to get the best rate.â
Starting with a financial institution allows you to get an idea of whatâs available to you. Then, youâre in a position where a dealer who wants to finance you has to match the rate youâve already been offered, rather than steer you toward an alternative arrangement.
With my own first auto loan experience, I had to deal with the fact that I had a thin credit file. I didnât have enough credit established to get a car loan without an unacceptably high interest rate.
I went through the steps of creating a budget and deciding how much I could afford, including factoring in my car insurance costs. However, after checking my credit report, I realized that having a credit card for six months wasnât enough for me to establish much of a credit history.
After compiling research about the types of used cars I could afford, and how my earnings from my job were enough to cover an auto loan payment, I approached my parents. My dad was willing to cosign on a modest car loan through his credit union.
My interest rate â and my monthly payment â were lower because I had cosigner with good credit. I made all my payments on time, helping build my credit history so that the next time I bought a car, I was able to get a good interest rate without the need for a cosigner.
As you research your options, donât forget about the possibility of using a cosigner. If you donât have the credit history to get a good auto loan rate on your own, borrowing someone elseâs good name can help you save money â while at the same time allowing you a way to establish your own credit for the future.
While you do want to figure out what monthly payment youâre comfortable with, you donât want to get caught up in it at the dealership, cautioned Shutt.
âFocus on the all-in price of the car,â said Shutt. âIf the salesperson can get you to verbalize a monthly payment target, theyâll just manipulate other factors like the duration of the loan.â
When that happens, Shutt pointed out, you might end up hitting your targeted monthly payment, but long-term interest charges and other factors could mean that your car ends up being a lot more expensive. She said you should figure out about how much youâll pay each month over a loan term youâre comfortable with, and then buy a car with a final price that fits those parameters.
âTake your time, and donât be manipulated,â Shutt said. âIf youâre not comfortable negotiating, bring a friend or family member who can support you in sticking to your budget.â
In some cases, you might discover that you qualify for a lower auto loan interest rate than you currently pay.
âMaybe youâve been making timely payments for a year or two and your credit score has gone up,â said Shutt. âNow you can consider refinancing the loan.â
However, itâs important to be careful moving forward. Just as you shop around for the best auto loan rates on a new loan, it makes sense to shop for refinancing rates. Check with a few banks and credit unions to see if you can get a few quotes for refinancing.
When you refinance, watch out for lengthening the loan term. If you only have three years on your term, it might not make sense to refinance to a five year loan. Instead, only refinance what you have left. You could save on interest charges and still get rid of your car debt in the original time frame.
Shutt also recommended looking online for car loans. Compare the rates you find with online auto loan refinancing platforms to what your local financial institutions offer. By playing different lenders off each other, you could strike a better bargain â especially if you have good credit.
Auto loans are a massive industry, with more than $1 trillion owed to U.S. lenders. Rather than being just another statistic, consider how you can come out on top.
Know your finances and understand what you can expect, Pendergast said. When you know where you stand, and when you research ahead of time, you can call dealers and lenders out. Shop around for the best auto loan rates and terms, and let dealers know youâve done your homework, so that negotiations will go much better, saving you time and, importantly, money.
If you want to be sure your credit is good enough to purchase a car, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.comâs free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter gradesâplus you get two free credit scores updated every 14 days.
You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.
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Yes, lenders have auto loans for people with no credit, but getting one is not guaranteed. It will depend on the lenderâs flexibility, the down payment you can afford, and the kind of car you want to buy. It may even depend on how you ask.
Phil Reed, senior consumer advice editor for the consumer auto site Edmunds has some good advice on how to get a car loan with no credit. He says a surprising number of people simply walk into a dealership and say, âHi, I have no credit, and I want to buy a car.â He doesnât recommend this approach. Instead, he offers these five tips for people who need a no-credit car loan.
If you have no credit or a thin credit profile, you should try to get preapproved for a loan before heading to the dealership. This will let you compare rates with any loan the dealer may offer. It may also give you a bargaining chip when negotiating the final deal.
If you have a relationship with a bank or credit union, you should start looking for financing there. Reed recommends making an appointment to meet with your bankâs loan officer in person.
âMake a case for yourself,â he says. That means bringing your pay stubs and bank account records with you. You should also check your credit reports, if they exist, and credit scores. You want to know as much about your credit profile as a lender would. If you donât know your credit score, donât worryâyou can check your credit score for free every month on Credit.com.
If you canât get a loan from your financial institution, you may be able to find a no-credit auto loan online. Just make sure itâs from a reputable lender. Credit.com can also help you find auto loan offers from trustworthy lending institutions.
A dealership could beat the offer you get from your bank or credit union. However, if you know youâre already approved for a loan, you can focus on comparing rates and prices instead of worrying about financing.
Reed says that itâs important to be wary. You donât want to feel so indebted to the dealer for âgivingâ you a loan that you fail to negotiate the price of the car. And if the dealerâs financing isnât better than the bankâs, at least you still have an approval in your pocket.
Having a good down payment or trade-in can also help your case. A trade-in would reduce the amount youâll need to borrow, and a larger down payment would show the lender some commitment on your part. Edmunds recommends putting at least 10% down on a used car, so start saving now.
Be sure the car youâre buying is affordable for you, even if itâs not the car youâd choose if you had more money and better credit. âIf you have no credit, itâs not the time to get your dream car,â Reed says. âYou have to choose the right car and the right amount [to borrow].â
You want reliable transportation you can afford. Making regular, on-time payments wonât just pay down your load, it will also build your credit, so donât get a loan that requires higher payments than you can comfortably make.
Sites like Kelley Blue Book, Cars.com, and Edmunds can help you find information on the cars that match your budget. When youâre at the car dealership, remember your budget and donât spring for optional add-ons you donât really need.
Reed cautions that when you get a loan with no credit, the interest rates youâre offered may seem appallingly high, but thatâs part of the cost of having no credit history.
When you donât have a credit score, lenders canât assess how big of a risk theyâre taking by giving you a loan. To protect the money theyâre lending, they will likely treat you as a high-risk borrower, which means the loan will have a higher interest rate.
As you make payments, youâll establish a pattern of reliably paying back money. Over time, you can improve your interest rate by refinancing. Reed says that, according to a dealership employee, a customer once lowered his interest rate from 13% to 2% in two yearsâ time by improving his credit and refinancing.
Reed advises against cosigningâa process that involves checking someone elseâs credit and using that score to qualify for a loan. It might get you a lower rate and help you get approved, but Reed says that if you bite the bullet and pay a higher interest rate rather than get a cosigner, youâll have the opportunity to build credit.
In addition, having a cosigner will tie that personâs credit to yours, and the way you repay your car loan will influence their credit. Reed says if youâre going to do it, do it only as a last resort, and make sure the cosigner is a relative.
Bottom line, though, as Reed explains, âItâs asking a lot.â Itâs better to finance the car yourself, pay on time, and build your credit. That way, the next time you need a loan, you wonât have to worry about whether youâll qualify.
Good credit doesnât just help you get reliable transportation: good credit can make a huge difference in improving your financial security and the peace of mind that comes with it. Start tracking your credit for free today at Credit.com. Your new car will get you moving around town, but your new credit score will get you moving up in the world.
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