Smart borrowers head to the car dealership prepared. They know what they want and how to get it. Anyone can learn the essentials of vehicle financing.

What to Know Before Financing or Leasing a Car

Before heading to a car dealership, buyers who plan to finance vehicles have some homework to do. Learning the basics of how vehicle financing and leases work allows buyers to increase their chances of driving away happy.

When to Lease Instead of Buying

For some drivers, leases offer the perfect solution. They come with low monthly payments and limited commitment. Leasing is an effective option for those who don’t drive often and find themselves in the showroom looking at new vehicles every few years.

The problem is that drivers who lease their vehicles have substantially less freedom. They must stay below strict mileage caps to avoid hefty fees and cannot customize the vehicles. Leased cars also provide no equity.

Although they can be more expensive, car loans don’t pose any of these problems. Buyers can usually access both options when they head to the car dealership.

Auto Loans Are Still the Best Option

While it’s true that buyers can apply for personal loans through banks to finance their vehicle purchases, that’s not the best solution. Applying for an auto loan at a car dealership is the more traditional approach, and it’s still the best one.

The problem is that dealerships sometimes intentionally offer drivers financing at higher rates than they could get at the bank. The easiest way to avoid this issue is to find a trustworthy car dealership.

Drivers who want to protect themselves can visit the bank beforehand to find out what interest rates the bank would approve for the loan. If the dealership’s interest rates are significantly higher, borrowers who take this extra step have a fallback.

The Rise of the Long-Haul Loan

Traditional car loans have terms of 24 to 48 months, which amounts to two to four years. However, it’s becoming commonplace for dealerships to offer loan terms of up to 84 months. The upside of this approach is lower monthly payments, but is it worth the trade-offs?

In most cases, no. Borrowers who take this approach pay significantly more overall due to interest. Plus, most vehicles need a lot of maintenance and significant repairs as they get older. Borrowers with seven-year loan terms will have to juggle monthly payments and repair bills.

There are almost always better options. Borrowers can get more attractive loan terms and payments on a used car, for example, or they could reconsider leasing.

How to Deal With Bad Credit

While many dealerships offer bad credit loans, that’s not the best solution. The current average interest rates for new and used cars are 7 and 11 percent, respectively. Specialized bad credit car loans can have interest rates above 21% APR.

There are two ways to handle this problem. The first is to delay that trip to the car dealership to improve credit standing. If that’s not possible, buyers can also try to find co-signers with better credit who can get a loan with a lower interest rate.

Buyers who have a trusted local car dealership are at an advantage. If they need help deciding what’s within their means or finding the right loan, they can ask for help.