Borrowing Smart: What to Know Before You Finance or Lease Your Next Car

With a little planning and prep work, you’ll save money, strengthen your negotiating leverage, and wind up with a more suitable purchase.


Before your first visit to a dealership, it’s best to work out exactly what you’re hoping to accomplish. That includes deciding what type of vehicle you need, how much you can afford to spend, and how much cash you have for a down payment. These are not questions you want a savvy salesperson to answer for you while you’re sipping on stale showroom Folgers.

Another very important question to ask yourself ahead of time is whether financing or leasing is the right move for you. Each option has distinct benefits and drawbacks depending on how you’ll use your new vehicle.

Should I Lease or Buy a Car?

While leasing often provides a lower monthly payment, it comes with mileage limits that some drivers may not be able to fit into their lifestyles. Estimate how many miles you drive per year. If it’s more than 15,000, financing is likely a better choice.

If you drive less than that and are prone to wanting a new car every few years anyway, leasing can be a good option. Keep in mind that maintenance and repairs are still something you will be responsible for, and at the end of the lease, you return the car (sometimes with a fee) rather than extract equity by selling it or trading it in.

Financing via an auto loan provides you more freedom because you own the car. You can keep it for as long as you want, drive as far as you want, and even customize it however you want. But fitting a higher payment into your budget might be a squeeze. If that’s the case, you could consider a lower-cost alternative to a vehicle you would have otherwise leased or look for a used or Certified Pre-Owned version.

Borrowing Smart

An auto loan, even in the days of high inflation and soaring interest rates, is still the tried-and-true method of securing a new car for many buyers. There are still deals to be had, but don’t expect to see any zero percent offers out there right now. Low-APR specials are typically showing up as short-term three- or four-year loans at 3.9 to 4.9 percent rates. For many people, the need for a lower monthly payment may push them into a more traditional loan of 60 to 72 months, which means applying through a bank. According to the consumer financial website NerdWallet, the average auto-loan interest rate in the third quarter of 2023 was 7 percent for new cars and 11 percent for used cars.

But where there’s need, there’s greed, and you’ll find it inside dealership finance offices. Did you know that dealers are compensated if they sell you a higher rate than the bank approved you for? Knowing your worth is the best way to protect yourself from such a tactic.

Before you start shopping, approach your bank or credit union and find out what interest rate you’d be approved for. Unless the dealer can beat that rate, you know you have a fair financing deal waiting for you with a trusted financial institution you already do business with.

Long-Haul Loans

Believe it or not, some lenders are now offering 84-month loan terms for new and used cars—and more and more borrowers are taking them up on it. That’s seven full years of making payments. Is it worth it? Not in most cases. While stretching out the length of time to pay for your new vehicle can give you an attractively low payment, it means paying interest for an even longer period.

Plus, consider the fact that in that seven-year time span, your vehicle is likely to require some repairs and major maintenance. Unless you can guarantee you’ll have the financial stability to be able to juggle a monthly payment as well as an expensive and potentially unexpected repair bill, consider choosing a cheaper new car or a used alternative so you can afford the payment of a shorter-term loan.

The other option would be to lease instead. If you’re not a road-warrior type who drives more than 15,000 miles per year, a lease might be a good way to get a new car you want at a payment that fits into your budget.

What If I Have Bad Credit?

Past credit mistakes can haunt you and make vehicle purchases more expensive. Subprime auto lending is one of the most predatory practices too, with NerdWallet estimating that interest rates on used-car loans have been known to exceed 21 percent APR for borrowers whose credit scores are below 500.

If you can, delay your purchase and work to improve your credit by paying off old debt and disputing inaccuracies on your credit report. NerdWallet suggests paying close attention to make sure you’re not using more than 30 percent of your available credit on any of your accounts. Pay bills on time and in full, and over time your score and history will improve.

Emergencies happen, though, and if a new-vehicle purchase cannot be delayed, consider getting a co-signer to help you secure a lower interest rate now. If that’s not an option, you could consider refinancing the vehicle after a year of on-time payments to reduce the interest rate.

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