Car finance, just like the vehicles themselves, comes in many shapes and sizes. Unless you are going to pay cash, before you even begin shopping for a vehicle, you should investigate the way you are going to structure the payments, since this may narrow down your list of potential models.
The first type of car finance payment type is the lease. Leasing a vehicle can be likened to renting an apartment in that you never own either one. In a lease, you pay for only that portion of the vehicle that you use. Your payment is divided up into three parts. The largest part is vehicle depreciation. The leasing company estimates how much the car or truck will depreciate during the lease term and divides this figure by the number of months of the lease. The next part of the payment is interest. The lease company determines the amount of interest per month then adds this to the depreciation figure. Once these two amounts are added, your local sales tax is computed to come up with the final monthly payment.
In addition to the monthly payment, the lease company may also charge you administrative costs – called inception (at the beginning) and termination (at the end) fees plus the cost of license and title fees.
The second type of finance payment type, and the most common, is the retail purchase. With a retail purchase, the buyer agrees to finance the price of the vehicle (selling price plus taxes, title fees and dealer fees) over a given period of time called the “term” that includes interest charges. Terms generally range from as few as 24 months to as many as 84 months. All else being equal, the shorter the term, the higher the monthly payment, although the actual amount of interest paid over the life of the contract will be lower . Conversely, the longer the term the lower the monthly payment, while the interest paid over the life of the contract will be more.
Tags: Car Credit, car loan