Although we’ve discussed this topic previously (see Lease vs Buy), there is one aspect that we haven’t discussed and continue to hear questions about.

The question is essentially this: “If a car dealer is offering a special promotional lease deal, a purchase rebate, and a low interest loan on the car I want, which one is the best deal?”

The short answer to this question is that the lease deal will nearly always be better — and it’s not simply because monthly payments are less. If the lease deal is one that is being offered by the car manufacturer, the company has usually applied a price discount, a low money factor (finance rate), and a high lease-end residual value. The combination of all these things makes for an attractive low monthly payment. Customers are not able to negotiate these kinds of deals for themselves  because a dealer only controls one of those three things — price.

Figuring car payments is easy if you have the right calculator — it’s not easy math otherwise

Car payment calculation is not simple math. It requires a rather complex business math formula that is not easily done by hand and most people are not capable, or not willing, to take it on. It’s not as simple as dividing loan amount by the number of months in the loan. Finance charges (interest), which change every month, must be accounted for.

It’s much easier to use a hand-held business calculator, such as the HP 12c or HP 17b, or, even better, use an easy online auto loan calculator which does the math for you.

To use a car loan calculator, you must know the amount being financed, the number of months you want to finance, and the interest rate. You’ll also need to know the down payment amount, if any, and the value of your trade-in vehicle, if any. You also need to know the sales tax rate that applies to your home location, not where you buy your car.

What are the advantages and disadvantages of car leasing?

Car leasing has it’s advantages and disadvantages. Here is a summary:

Pros:
- Get new car every 2-4 years, with latest features and safety equipment
- Lower monthly payments
- Usually no down payment
- Car is always under warranty
- Lower sales tax (in most states)
- Avoids used car selling/trading hassles
- Automatic GAP insurance included (most leases)

A Car Loan Story

David, 17, recently graduated from high school, landed a good paying job, and wanted to buy a new car.

His thought was that he would go to his neighborhood Ford dealer where he had been admiring a bright red Focus model that he felt he could afford, and arrange for a convenient loan to pay for it. He could easily get approved for the loan because his father knows the owner of the dealership. 

The car cost $12,000 with discounts and rebates. He thought a 5 year (60 months) loan would be about right because he figured payments to be $200 a month ($12,000 divided by 60 months), which he could easily afford.

David was wrong — in many ways. Let’s see why.

How Does Car Leasing Work?

Car leasing is extremely popular because it offers a more affordable method of auto financing. It allows you to have lower monthly payments than with traditional auto loans. About one out of every five vehicles driven by automotive consumers in the United States are leased.

But car leasing is not for everyone. Is leasing good for a teen’s first car? What are the pros and cons of leasing?

Leasing is a little more complicated than buying with a loan, so you should take the time to learn about leasing, and be sure it’s right for you before making a decision.

What is a Lease?

Both leasing and buying a car with a loan are simply two different methods of financing. Where a purchase loan is a method of financing the ownership of a vehicle, leasing is financing the use of a vehicle for a specified number of months, similar to renting but not quite the same thing.

How do I know how much car I can afford?

Assuming you’ll buy with a loan, you will want to have a monthly car payment that will fit within your current income, after considering all your other expenses. Don’t make the mistake of buying based on future expectations — a forthcoming raise, a new job, or other potential improvements in your finances. Your expectations might not come to reality and you’ll be stuck with a car you can’t afford. Base your purchase only on current, stable finances.

Is it possible to get a car loan and buy a car with no credit?

The answer? Yes, under some conditions. Let’s explain.

It is a common situation, especially with young people who have never had a loan, never had credit cards, or never borrowed money for a car. Without a history of prior loans and payments, there is no credit history and no credit score, which is the number that represents credit rating.

In fact it is not quite sufficient to simply have a good credit score to get a car loan — or any loan. You may also need to have an established steady income (a job) and no excessive debts. You should have no recent bankruptcies or auto repossessions, which you wouldn’t be likely to have anyway if you have no credit.

So how is it possible to buy a car with a loan when you have no credit record and no credit score?