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With prices averaging more than $31,000 for a new vehicle and $17,000 for a used model from a dealership, you might consider financing or leasing your next vehicle.

Financing Options

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

Direct Lending

In direct lending, you get a loan directly from a bank, finance company, or credit union. You agree to pay, over a period of time, the amount financed, plus a finance charge. Once you enter into a contract with a dealership to buy a vehicle, you use the loan from the direct lender to pay for the vehicle.

Direct lending may offer you:

• Comparisons. You have the chance to shop around and ask several lenders directly about their credit terms before you agree to buy a specific vehicle.
• Credit terms in advance. By getting financing before you buy the vehicle, you will know your rate and other terms when you are shopping.

Dealership Financing

In dealership financing — another common type of vehicle financing — you get financing through the dealership. You and a dealer enter into a contract where you buy a vehicle and agree to pay, over a period of time, the amount financed plus a finance charge. The dealer may retain the contract, but typically sells it to a bank, finance company or credit union — called an assignee — that services the account and collects your payments.

Dealership financing may offer you:

• Convenience. Dealers offer vehicles and financing in one location and may have extended hours, like evenings and weekends.
• 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.
• Special programs. Dealers sometimes offer manufacturer-sponsored, low-rate or incentive programs to buyers. The programs may be limited to certain vehicles or may have special requirements, like a larger down payment or shorter contract length (36 or 48 months). These programs might require a strong credit rating; check to see if you qualify.

Remember: Shop around before you make a decision about buying or leasing. Consider offers from different dealers and several sources of financing, including banks, credit unions, and finance companies. Comparison shopping is the best way to find both the vehicle and the finance or lease terms that best suit your needs.

Before You Buy or Lease a Vehicle

Consider Federal and State Laws

Review the federal and state laws that affect the vehicle financing and leasing process. These laws offer important information that can help you negotiate a better deal or better understand the process. They also give you certain rights.

Determine How Much You Can Afford

Before you finance or lease a vehicle, take a look at your financial situation to make sure you have enough income to cover your monthly living expenses. Then, if you want to finance a vehicle, know that the total amount you will pay will depend on several factors, including the price you negotiate for the vehicle, the Annual Percentage Rate (APR), which may be negotiable, and the length of the credit contract.

Finance or lease a vehicle only when you can afford to take on a new obligation. Check the overall costs for the purchase or lease. Consider the monthly payment in finance or lease negotiations. You may want to use the “Monthly Spending Plan ” worksheet as a guide.

The only time to consider taking on additional debt is when you are spending less than you take home. The additional debt load should not cut into any amount you have committed to saving for emergencies and other top priorities or life goals. Saving for a down payment or trading in a vehicle can reduce the amount you need to finance and reduce your financing costs. In some cases, your trade-in vehicle will take care of the down payment on your new vehicle.

If you owe more on your vehicle than its market value, you have negative equity in your vehicle. This is a consideration if you plan to use your vehicle as a trade-in. The longer your new credit contract, the longer it will be before you have positive equity in the new vehicle — that is, before it is worth more than you owe. If you have negative equity, you may need to make a bigger down payment. Or the dealer may offer to include the negative equity in your new finance contract by increasing the amount financed to include the amount you still owe on your current vehicle. This will increase your monthly payments on the new contract in two ways: it adds to the amount financed and increases the finance charge. If you have negative equity in your vehicle, consider paying down the debt before you buy another vehicle. If you use the vehicle for a trade-in, ask how the negative equity affects your new credit obligation.

Monthly Spending Plan

Consider all the costs involved, not just the monthly payment, for financing or leasing a vehicle. Knowing your monthly spending and saving commitments and habits will help make your budget more realistic.

1. Complete Column 1 based on your current situation. Start with your monthly take-home pay. This is how much you have left after taxes and other deductions.

Subtract the amount you need for all your saving goals and monthly expenses, including monthly credit payments and payments for housing and utilities.

The remaining balance is the maximum you can afford to put toward the monthly payment for a vehicle and any new related expenses, like vehicle insurance.

Complete Column 2 based on your new situation. This column will show your new vehicle payment and the adjustments you have made to accommodate your expenses and credit obligations. Adjust any expenses that might go up or down when you get a vehicle, such as maintenance and insurance expenses.

The remaining balance in Column 2 will show you whether you can afford the new vehicle payment and the change in expenses.