Financing an Auto

Once a consumer decides to acquire an automobile, the next step is to decide how to pay for it. There are three methods of financing an auto:

  • Pay cash: Using already accumulated funds.
  • Borrow the funds: Taking out a loan and paying for the vehicle over time.
  • Lease: Allows use of an auto for a specified period of time, in return for regular
    monthly payments.

The decision as to whether to pay cash, take out a loan, or lease a vehicle is usually made after considering a number of personal and financial issues.

Factors to Consider

The table below compares some of the factors to consider when considering how to fmance an auto.

  Pay Cash Borrow the Funds Lease
Method of Financing Consumer uses cash to completely pay for the vehicle at the time of purchase. Consumer borrows the funds to purchase the vehicle, and makes monthly payments to repay the loan. Consumer obtains the right to use the vehicle for a specified pariod of time, in return for monthly payments.
Out-of-Pocket Costs Entire purchase price. Down payment and/or trade-in. Special offers may allow zero down. Down payment and/or trade-in. Often less than for an auto loan. Special offers may allow zero.
Monthly Payments None Payments cover rreapyment of loan amount, plus interest. Payments cover estimated depreciation during the lease period, and other costs. Typically less than for an auto loan.
Vehicle Ownership Consumer is the owner. Consumer is the owner, subject to a lien held by lender. Once loan is repaid, consumer takes title free and clear. Lender may repossess vehicle if payments not made as scheduled. Leasing firm retains ownership. Consumer usually has the right to purchase the vehicle at the end of the lease.

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