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What's The Difference Between A Car Loan And Auto Leasing?

It is a common misconception that an advertised monthly car payment of $99 is a better deal than, say a $250 payment.

Money is a commodity on the market, and as such costs more or less the same in terms of interest rates, within a few fractional price points. So why do lender's offers differ so much?

Several factors influence the rate that the lender will charge you for the loan. It is important to know these factors if you want to be able to determine if you are really getting a good deal.

The prevalent prime rate is one factor that no lender has control over. So this is the starting point of the calculation. Here are some of the most common factors that can vary from one lender or dealership to another:

The purchase price of the car. Well, this seems obvious. A $50,000 sticker price will have a higher monthly payment than a $20,000 car.The manufacturer rebate. Now this has a lot of potential uses, and this is also where it gets confusing.

Most car models will get some amount of incentive, sometimes referred to as cash back. Will the whole amount be factored into the loan? This could be either as a downpayment to reduce the loan amount, or as a "rate-buydown" to lower the interest rate. Or will a portion be used to offset registration fees and/or taxes? It is a good idea to know beforehand what official incentives and rebates are currently available. Do your research online to save time.

Your downpayment. This could be a chunk of cash plopped on the dealer's table, or the value of you old car, if you trade it in. More on trade-ins later. Your credit score. It's no secret, your credit score plays an important role in determining how much car loan amount you qualify for and the interest rates the lenders will charge you.

Before you even hit the showrooms you should have a good idea about what your credit score, or FICO score, says about your credit worthiness. If you don't know your scores now is the time to find out.

The duration of the loan. A loan for 24 months will have a higher monthly payment than a 60-month loan. Yet the shorter loan would be "cheaper" overall. First, because the interest rates for shorter loans are generally lower, and second, because, well, you will be paying interest for a shorter period of time. Makes sense, doesn't it?

Another interesting fact is that during the entire duration of the loan the ratio of principal (amortization) and interest is not distributed equally. This means that in the beginning, a greater portion of your payment will be allotted for interest and fees. The principal, which pays off (amortizes) the loan amount, will be small at first, and then increase the closer you get to the end of the agreed term.

Normally, this shouldn't concern you much, but it will gain importance if, for some reason, the loan gets terminated before it's due date. The earlier this happens, the greater the risk that the car's market value is less than the amount owed, especially if you bought the car brand new and financed more than 80%.

You may have heard the sad fact that a new car loses 20 - 25% of its value the moment you drive it off the dealer's lot. But it might take you 2 years before you paid down 20% of your principal loan amount. You could find yourself in the uncomfortable position of being indebted to the lender.

Having an insurance which covers the new car price in case of a major accident or theft during the entire first year helps greatly to reduce this risk.

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