Car Finance – how much are lenders willing to lend and how much car can you afford.

Do you know your credit score and what lender doors that this opens or doesn’t open to you?

Are you prime or sub-prime?  

Knowing this will allow you to call around to a number of local lenders to get a car finance loan rate or a lease rate quote on a new car or used car.  Lenders will be able to tell you the rate you can get based on your credit score.  

Your credit score isn't the only criteria lenders use though; Your car finance rate is also affected by what you buy (new vs. used) and from whom, for example... financing a used car you brought through a dealership will get you a lower loan rate than a used car brought from a private owner.  

Before reading this section any further you may want to see the Credit Score Information section and read up on this topic (click the link), then come back here to finish up.  It could give you a whole new perspective.

What you want may not be what you can afford or need.

Let’s be practical…we all want a high-end luxury vehicle, but man, what a monthly payment.  

So what other choice do you have but to work within your financial budget, and if that means getting a more economical car instead of luxury vehicle, then so be it.  

Well, you do have another option if you’re not willing to compromise though – wait!  

Wait until your financial situation improves or you have enough money saved for a down payment that will keep your monthly payments low or at least within reason.

Here’s how to determine your car finance options.

Generally, you should go for the auto manufacturer's financing at the dealership.  The rates are typically lower than what banks, savings & loan and credit unions offer because they are subsidized by the auto manufacture to generate sales.  

Keep an eye out for a promotional APR on that auto you've targeted to buy.  A good time to visit the dealership is at months end when the sales staff is trying to make monthly quotas or better yet, during year-end clearance.

It also wouldn't hurt to get pre-approved by your bank, savings & loan or credit union for a maximum loan amount before you even go to the dealership, just in case you don’t meet the auto manufacturer’s loan criteria.  This signals to the dealership that you are serious and ready to buy.  

Here's something else to think about -- rather than an auto loan, consider an equity line of credit on your home, if you own one.  The interest rate could be a couple percentage points cheaper and the interest on the loan can be tax deductible.  Talk to your favorite bank, savings & loan or credit union representative about qualifying for a line of credit.  

Should you lease or buy?  

First keep in mind that excellent or near excellent credit is required to qualify for a lease.  With that being said, if you want to drive a new vehicle every couple of years and you don't mind a constant car payment, then I'd say lease is the way to go.  

Besides, you get to drive more car than you could normally afford otherwise.  Since the same car payment for the car would be lower for a lease as compared to a purchase, you can get the model with all the power options and leather seating for the same monthly payment.

You can do this because when you buy you're financing the whole thing, but when you lease, you are financing only the value of the car during the lease term or length of time you own the car.   

I hear you shouting -- leasing, leasing, is what I want to do!  

Ah, yes, leasing, on the surface, seems to be a better decision than buying a car outright since your monthly payments are lower than if your did a purchase.  

But don't be fooled...take a few steps back and look at it from a different angle, and the picture tells a whole other story.  

Get a pencil and paper out and compare cost of ownership over, say, a 10-year period.  

Now what do you see?  

Well, before you write anything, I'll tell you; then you can check for yourself.  

What you see is that it actually costs less to own the car outright, since you'll eventually pay it off and live payment free for six or seven years, where as when you lease, your car payments never end.  

You’ve come full circle.

With that logic aside, what it really all boils down to is personal choice.  

Do you like driving a new car every couple of years?  Then a lease is for you.  

Or are you the type that sees your car as just a means of transportation to get you from point A to point B and your looking to save money in the long run?

Then buying to own and paying the higher car payments until the loan is paid off is the right choice for you.  

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