One of the first large purchases a person typically makes is a car. Although the process can seem a bit daunting, it is far less complicated than it seems. Once you have a basic understanding of what financing a car means, you will be far more capable of choosing the right option for you.

To get started, take a look at what financing a car means: put simply, you want to be a car, but you don’t have the money to pay for it in full. So instead, you finance the vehicle or pay the car off over time with either a loan or a lease. The most important thing to understand about financing is that along with the loan or lease comes interest rates, fees, and other costs, so although financing happens more often than not, it is more expensive to do so than to purchase the car outright.

Once you have determined that financing a car is your best option, it is time to look at whether you want to finance through a loan or a lease.

Loan v. Lease

There is a distinct difference between loaning and leasing: when you are financing a car with a loan, you are paying to own the vehicle, whereas if you are financing a car with a lease, you’re paying to use the car, not to own.

Financing a car through a loan consists of 3 factors: the loan amount, the annual percentage rate (APR) and the length of the loan. Use a calculator like THIS one to determine how various loan amounts, APRs and loan periods will affect your monthly payment. Other essential components to remember:

  • Interest rates are typically higher when financing a used car than a new car.
  • Check your car loan for a no prepayment penalty. Avoiding this clause can save you money if you decide to pay off your loan early or refinance your car loan.

Financing a car through a lease is a bit different. Rather than making payments to own the car eventually, leasing a car means you are paying to use the car not keep it. The payments and interest rates are typically more inexpensive for a lease, but once the lease term has ended, you lose out on any trade-in or resale value on the vehicle. Key factors to remember when leasing a car:

  • Keep an eye on the number of miles driven. Most leases charge you per mile once over the agreed number of allowable miles.
  • You will have to keep the car clean and tidy. Any wear, tear, and damage to the car will result in more charges.
  • It is possible to purchase a car at the end of the lease term. However, this is typically more expensive than purchasing a vehicle to begin with.