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Smart planning is the key to affordable auto financing

Posted on Tuesday, September 17, 2013 at 12:01:21 PM

Recently, data indicates that more people than ever before are using automotive financing to lease new vehicles. Slightly greater than 84 percent of all buyers preferred this method, according to Experian Automotive, the highest number since this measurement began in 2006. There are positives and negatives for going this route, as well as for buying a vehicle instead.

Overall, auto financing offers opportunities for the borrower. Choosing whether or not to lease or buy could be tricky, however. Christine Dikdan, of Home Loan Investment Bank, provided some advice for prospective shoppers looking to get the most for their money.

"I am anti-lease individual," explained Dikdan. "You have nothing to show at the end except to 'buy out' the lease. If you don't have the cash to do so at that point, you start at ground zero with a new loan. Think 'rent a car' that you just turn in and rent another one. One benefit I can see for leasing a vehicle - due to a low down-payment and a low monthly payment - is that buyers can usually afford a more expensive vehicle. This is because a lease payment is based on a percentage of the vehicles worth, which is why you have a large buyout amount at the end of the lease."

The vehicle buyer should also be aware of other conditions that could be included in a lease.

"Leasing also charges for overages in mileage, and if you are going this route plan accordingly," Dikdan recommended. "You may want to consider purchasing extra mileage at the onset of a lease, since this is a cheaper option than owing for the additional mileage used at the end of the lease termination period. In the past, I've had customers 'buy out their lease' and finance the buyout amount, plus an additional mileage surcharge, because they could not afford the cost of the overage on the mileage. They did not necessarily want to go this route - but due to the amount owed they needed to. Unpaid lease deficiency balances are often reported to credit bureaus."

Purchasing a vehicle is a big decision, both going with a lease or buying. While automotive financing is a help for many, important steps should be taken before moving forward.

"Research and purchase the vehicle that best fits your needs, but more importantly choose one that you can afford the monthly payment on," said Dikdan. "This may mean you may not be able to get the vehicle you really want - but you get the one you need. Keep in mind the additional costs associated with owning or leasing a vehicle such as insurance, vehicle maintenance, and repairs. Even new vehicles require this consideration. A vehicle is a machine - and machines break."

In addition, the perfect vehicle is one that is affordable, and fits a certain need. Making payments on time should always be a priority, and Dikdan explained several key steps to achieve this goal.

"Rule number one: Make your automobile payments on time, always," she added. "If you know you are not good at money management consider ACH or automatic bill pay. If you did the proper planning ahead of time then this should not be an issue, providing your financial and health circumstances are the same. You may inquire with the dealer or your insurance company about accidental disability insurance. This is not a widely discussed topic, and due to the extra cost often gets the 'no' from the buyer at the time its presented. If you have even an inkling that your circumstances may change it may be worth the extra cost in the monthly payment if you know you would not be able to make the payment due to a circumstance change."

"Always better to play safe than sorry when financing," Dikdan concluded. "We all know what one or more recent 30 day late payments can do to an otherwise good credit score. Unfortunately it is a lot easier to tank your FICO credit score than repair it."

Therefore, affordable auto financing comes from having a good plan in place, as well as doing the proper research into the many factors that change a monthly payment.