Understanding Car Finance

It is important to understand car finance when purchasing a new or pre-owned vehicle. Whether you are pursuing a lease or loan to purchase, the terms, conditions and contract language will have an impact on costs and usage. It is your responsibility as a buyer or lessee to understand how financing affects you.

Aside from paying cash for a car, there are two basic ways that cars are acquired. This can be accomplished through a lease option on the vehicle or a loan arranged for the car's purchase. Both of these options offer advantages and disadvantages to you.

A lease may be right for you in those situations in which you do not expect to hold the car for long term. If you expect to drive a lot or like the ideal of ownership, financing a vehicle purchase through loan may be a better alternative.

A lease gives you the flexibility of taking possession of a car for a short period of time and the ability to receive a newer vehicle at the end of the lease period. It is a way to get in and out of a new car in 2 or 3-year intervals without the depreciation costs associated with buying the car outright.

If you are considering a lease, you should be aware that there are some restrictions placed on the amount of miles available in a lease year. This is done because the car company would like to limit the wear and tear associated with the vehicle's usage during the lease period. Excessive wear and tear caused by driving and increased mileage makes the vehicle difficult to sell once the lease expires.

If you anticipate driving more miles than what is allotted in the lease, a lease option may not be the best fit for your needs. However, if you do not anticipate doing much driving and like the idea of getting out of the vehicle in a short period, considering a lease makes sense.

For individuals who anticipate heavy vehicle usage or wish to own the car outright, loan financing is more appropriate. With a loan, you are not restricted on how to use the car since you own it. Of course, with ownership you accept the vehicle's depreciation cost from the moment you drive it off the lot. You also have a loan obligation that has to be satisfied in order to keep the car.

Vehicle loans are provided by a finance company, either owned or controlled by the automaker or some other third party lender. It can even be your own bank. On your behalf, the car dealer handles arranging for a loan unless you have already been pre-approved by your bank or outside finance company.

One aspect of vehicle financing, whether you are looking at a lease or loan, is the annual percentage rate. This is also known as APR and it takes into account the loan or lease's interest rate plus the amount of fees and charges. In some cases, these fees are a one-time occurrence such as tax, license and vehicle origination charges. Some vehicles sold in states similar to California may have emissions charges to combat pollution.

All of these fees and charges affect the overall rate you pay. It is a good idea to have the dealer calculate and show you the components of the APR in order to get a better understanding of how the fees affect the amount you pay for the car.

Factor in the above with what's best for you and you'll have a clearer notion of car financing.