Bitcoin tops 41,000. Check current cryptocurrency prices here:

Financing a Car Purchase

Follow by Email

car financingBuying a car is one of the most expensive consumer purchases one can make so most people need financing or leasing to purchase a vehicle. 

Some car buyers obtain a loan directly from a finance company, bank or credit union (direct lending). 

In direct lending, a buyer agrees to pay the amount financed (principal), plus an agreed-upon finance charge (interest), over a period of time. Once a buyer and a car dealership enter into a contract to purchase a vehicle, the buyer uses the loan proceeds from the direct lender to pay the dealership for the vehicle.          

Another common type of vehicle financing is “dealership financing.” In this arrangement, a buyer and a car dealer enter into a contract where the buyer agrees to pay the amount financed, plus an agreed-upon finance charge, over a period of time.

The dealership may retain the contract, but usually sells it to an assignees (such as a bank, finance company or credit union), which services the account and collects the payments. Packaging and re-selling the contract along with other contracts into Collateralized Debt Obligations (CDOs) was the standard practice until recently when the market for CDOs collapsed contributing to the credit crunch.


Monthly car payments will be lower on a lease then a purchase because you are only leasing the car or only paying for the car’s expected depreciation during the lease time but you will have to turn the car in at the end of the lease or purchase it at the agreed cost. You will also be charged if you end the lease early, sometimes the charge can be costly.

When leasing you have to consider the total lease cost, the upfront cost (usually you have to put down thousands of dollars), the monthly cost and the costs at the end of the lease. Before you sign a lease be sure to compare different offers and terms, particularly the mileage limits, if you exceed the mileage limit you will have to pay for the additional mileage driven over the limit.  Most leases are calculated based on a certain number of miles you can drive each year, usually 15,000 miles.

When you lease, you are also responsible for excess wear and damage. You must also service the vehicle in accordance with the manufacturer’s recommendations. You will also have to have insurance that meets the leasing company’s standards.

How much can I afford?

Evaluate your financial situation and figure out how much you can afford in monthly payments before going to a dealer. A longer term contract may mean smaller monthly payments than a shorter term contract but will result in more money paid over the life of the contract.

Part of figuring out how much you can afford is figuring out what you need in a car and what you want. You can also negotiate your finance terms or lease terms, especially these days, if you can’t get a lower rate, negotiate for options on a car. The most important part of purchasing or leasing is reading the contract before you sign, you are obligated to the terms of the contract once you sign.

Terms you should be familiar with before purchasing or leasing a car:

Down Payment – An initial amount paid to reduce the amount financed.

Extended Service Contract – Optional protection on specified mechanical and electrical components of the vehicle available for purchase to supplement any warranty coverage provided with the new or used vehicle.

Credit Insurance – Optional insurance that pays the scheduled unpaid balance if you die or scheduled monthly payments if you become disabled. As with most contract terms, the cost of optional credit insurance must be disclosed in writing, and, if you want it, you must agree to it and sign for it.

Guaranteed Auto Protection (GAP) – Optional protection that pays the difference between the amount you owe on your vehicle and the amount you receive from your insurance company if the vehicle is stolen or destroyed before you have satisfied your credit obligation.

Amount Financed – The dollar amount of the credit that is provided to you.

Annual Percentage Rate or “APR” – The cost of credit expressed as a percentage.

Finance Charge – The total dollar amount you pay to use credit.

Fixed Rate Financing – The finance rate remains the same over the life of the contract.

Variable Rate Financing – The finance rate varies and the amount you must pay changes over the life of the contract.

Monthly Payment Amount – The dollar amount due each month to repay the credit agreement.

Assignee – The bank, finance company or credit union that purchases the contract from the dealer.


Author: Jason P. Jones
December 2nd, 2008

MBR In the Press

Certificate of Deposit Calculator

Certificate of Deposit Calculator

Mortgage Calculator

Mortgage Calculator

Debt Calculators

Debt Consolidation Calculator
Credit Card Payoff Calculator