Car Buying 101

One of the most important rites of passage in America is getting a driver’s license.  And while you might have been licensed to drive someone else’s car since you were 15 1/2 or 16, the other part of this rite of passage is actually owning your first vehicle.  So without further ado:

Leasing – Car leasing is actually the opposite of car buying.  Like the lease on your aparment, car leasing is essentially renting a car.  But I would like to talk about it, because leasing a car certainly feels like you are buying a car.  Your monthly payments are lower than if you were to finance it, though your car insurance might be higher.  This option allows you to continually drive around a nice brand-new car.  The caveat is that at the end of the lease (usually 3 years), you have to return the car and it has to be in relatively good condition.  So despite diligently paying your monthly payments for the past 3 years, sadly the car will not be yours, although you do have the option to buy the car at the residual amount stated on your lease contract.

Financing – Continuing with our real estate analogy, car financing means you take out a loan to buy a car and you have about 3-6 years to pay off the loan, much like a mortgage.  The financing terms, such as the interest rate and length of time to pay off the loan, will depend on your credit score (which we will talk more about in a later post) and how much you can afford each month.  If you want to finance your car for 5 versus 3 years, for example, your monthly payments will be lower, but you will be paying more in interest in the long run. 

Financing limits the kinds of cars you can have since you should only buy cars you can afford.  The silver lining, however, is that you will actually own the car at the end of the financing period.  And financing is available for both new and used cars.  I don’t believe there is an absolute best choice between new and used cars, just a better choice depending on each person.  If the used car you are buying is only 1-2 years old though, you might want to shell out the extra few thousand for the new version.  The cash of clunkers act and the vehicle sales tax deduction also make for good incentives to buy new, at least during this year (click here to read more).

For more information, such as car reviews and pricing, check out Edmunds.


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