Complete Guide to Car Loans & Leasing

Use our car financing tools to apply for a new or used car loan, or to refinance your current vehicle. Our calculators can help you estimate monthly car payments and find out which cars you can afford. We also have tips on how to finance a car and whether you should buy or lease.

Car Loans and Leases

Getting a car loan or leasing a car isn't something most people do often. Not only is the process something that you may not have a lot of practice with, but car loans and leases have their own vocabulary, steps, and pitfalls. We’ve put together this guide to help you finance or lease your next car with confidence, and we’ll show you how to avoid paying thousands more than you should.

At U.S. News Best Cars, we’ve been helping people find the right car and navigate the car loan and leasing process since 2007. The writers of this guide are experts when it comes to car financing and leasing, with decades of experience helping consumers. We’ve also interviewed experts from automotive lenders and credit bureaus to give you an inside look at how financing and leasing works. If you invest some time reading this guide, you’ll be able to lease or finance your next car while avoiding mistakes that can cost you money.

Here’s what we’ll cover in this guide:

How to Finance a Car

Financing a car simply means getting a car loan. Rather than pay cash up front, car financing requires that you take out a car loan and pay it back over time, usually with interest. This is the path that most car buyers take when purchasing a car. However, the process of taking out an auto loan can be complicated, and making mistakes can have long-term financial consequences.

The first step to saving money on a car loan is to shop around for a loan just like you’d shop around for a car. Although a car dealership can handle financing for you, they’ll be looking to make a profit, and their profit comes from your pocket. Contact banks, credit unions, and other lenders to get an idea of the type of loan you qualify for, which will help you secure the best deal on your new car loan.

The interest rate and the loan term are two major factors in determining if a car loan is a good deal or not. The interest rate on a car loan is the amount the lender charges you to borrow their money. It’s a percentage of the loan amount, and it accumulates over the length of the loan, also called the loan term. While taking a long time to pay your auto loan back can lead to lower monthly payments, it gives more time for interest to accrue, costing you more money in the long run.

Because the interest rate you pay on your car loan is the biggest driver of the overall cost of the loan, you’ll want to make sure you get the best rate you can. People with excellent credit get the lowest rates because they’re at a lower risk for defaulting on the loan and not paying it off. People with poor credit ratings will pay higher rates because there’s a higher chance they won’t repay the loan in full. If your credit isn’t in the best shape, consider spending a few months rehabbing it. Paying bills on time and lowering your debt-to-income ratio can help you save thousands in interest on your car loan.

Beyond the interest rate, the down payment you make has a huge impact on your car loan. A down payment is a cash payment that offsets the amount of money you need to borrow to pay for a car. Your down payment can come from money you have on hand, equity you have in your trade-in, or from a cash back deal offered by the automaker. A hefty down payment not only lowers your car financing costs, but it also decreases the risk that you’ll owe more on your car loan than what the car is worth.

Read more about how to finance a car and get a car loan.

How to Finance a Used Car

Financing a used car has a few key differences from new-car financing. While a lot of the loan terms are the same, you need to make sure you’re getting the right loan for your purchase.

Used-car loans tend to have higher interest rates than new-car loans because lenders see them as a higher risk. Used cars are often out of their manufacturer’s warranty, which means that they could have expensive repairs, making it tougher for you to keep the car running and make your car payments.

Even though you likely won’t get as low of an interest rate on a used car loan as you would on a new-car loan, you should still shop around for the best rate you can get and show up at the dealership with financing. That way, you can focus your negotiations on the price of the car, not your loan terms.

With a used-car loan, you’ll want to pay particular attention to the loan term. While stretching out a used-car loan over six or seven years will give you low monthly payments, you’ll want to make sure the car will still be running for that long. After all, you don’t want to be making payments on something that’s broken down in your driveway. Our used car rankings can help you find a dependable used car, but keep the life of your used car in mind when getting used-car financing.

Read more about used car finance options.

Buying vs. Leasing

Buying isn’t right for everyone, and leasing a car isn't right for everyone. We’ll help you decide which option makes the most sense for you.

When you buy a car, you pay – either in cash or with a car loan – for the full price of the car. When you lease a car, you only pay for its depreciation over a set period of time. For example, if you’re buying a $40,000 car, you pay the full $40,000. If you lease that car for three years, and it’s expected to be worth $28,000 at the end of the lease, you only pay the difference between the price and residual value – in this case, $12,000.

What you pay for the lease is broken into monthly payments. In most cases, you’ll be expected to pay some money up front, and you will need to pay interest on the lease, which in leasing is referred to as the money factor.

Not everyone will qualify to lease a car. Most leases, especially ones that are incentives offered by the manufacturer, require very good credit to qualify.

Also, not everyone should lease a car. Car leases have mileage limitations, and you can face steep penalties if you exceed those limits or put too much wear and tear on the car. However, leasing does tend to give you a lower monthly payment, and you get a new car every few years.

Read more about buying vs leasing a car.

How to Lease a Car

Though leasing has grown in popularity in the past few years, it’s still a foreign concept for many car shoppers. Making a car-leasing mistake can cost you thousands over the life of your lease, and you can run up expensive penalties and fees when your lease ends.

Shopping for the best lease deal is a crucial step in saving money when leasing a car, but many consumers don’t know how to compare lease deals. The fact that leasing uses different vocabulary than car loans can make it difficult for you to compare deals and figure out how much you’ll actually end up paying for your new car lease. Before leasing a car, you’ll need to understand the meaning of different lease terms, know what parts of a lease are negotiable, and be able to compare lease deals. It’s also important to know the impact of your credit on your ability to lease, and the limits on most car leases. You’ll also have to know what to do when your lease ends.

Read more about how to lease a car.

How to Buy a Car with Bad Credit

You might have a few dings on your credit report, but you still need a car. Having bad credit puts some significant hurdles between you and getting a car loan, but you can overcome each of them.

If you can hold off on buying a car, take some time to improve your credit. Lower your debt-to-income ratio and pay your bills on time for a few months. Those steps can boost your credit score and net you a lower car-loan interest rate.

If you can’t wait for a new car, you’ll likely end up paying more for a car loan if you have bad credit. That said, you should still shop around and get competing quotes from lenders to make sure you don’t pay too much for your loan. After you get a car loan, there are other steps you can take to continue to rehab your credit and even lower your car-loan costs.

Read more about bad credit car loans.

How to Refinance a Car Loan

Maybe you didn’t get the best deal on financing when you bought your car, or maybe your credit score has improved since you bought it. Refinancing your car loan can get you a lower rate, more affordable payments, and save you thousands.

However, refinancing a car loan isn’t always easy. While you might get mailers or ads from lenders asking you to refinance your car loan with them, you still need to do your research. Refinancing a car loan means comparing offers from lenders and running the numbers to make sure that you don’t end up losing money on the deal.

In order to refinance a car loan, you’ll need to apply to lenders for a new car loan. They’ll pull your credit score, so make sure you’ve checked your credit report recently. You’ll want to dispute any errors on your report before applying. Once you have offer from lenders, you’ll need to compare what they’re offering, looking at the overall cost of the new loan, including any fees, and not just a monthly payment.

There are also a few situations where you should not refinance your car loan, like if your credit score is worse than when you took out your loan, or you owe more than your car is worth. If your current interest rate is very low, a new loan likely won’t match or beat it.

Read more about how to refinance a car loan.

Car Payment Calculator

Car financing isn’t the kind of math most people can do in their heads. Sure, you could break down the price of the car you like into monthly payments, but that doesn’t take taxes, fees, or finance rates into account.

Factors like your interest rate, the length of your loan, the value of your trade-in (if you have one), or any down payment you make can have a drastic impact on your monthly car payment. While your dream car may seem affordable, if you can’t fit the payment into your monthly budget, you won’t be able to get that car in your driveway and keep it there. Our car loan calculator will translate the MSRP of the car you want into monthly payments so you can make sure it fits your budget.

Check out the U.S. News Car Payment Calculator to calculate your ideal monthly car payment.

Car Affordability Calculator

What if you know how much you can afford for a monthly car payment, but don’t know how much car that monthly car payment will buy you? If you can swing $200 a month, can you get a $25,000 car? Our car affordability calculator will help you figure it out.

As a general rule, you don’t want your monthly debt repayments – that is, how much you pay on all debt, including things like credit cards and student loans – to total more than one third of your take-home income (after taxes). Figuring out your ideal car payment is easy. First, look at your paycheck to see how much money you take home each month, then divide that number by three. Finally, take that number and subtract the amount of all your monthly debt payments. Whatever is left over is a good guideline for the car payment you can afford.

Other factors affect how much car you can afford. A large down payment can lessen the amount of money you need to borrow, and you’ll be able to afford a more expensive car without raising your monthly payment. Having excellent credit and qualifying for a low-interest car loan will also allow you to buy a more expensive car without making your monthly payments higher. Choosing a longer loan term – essentially taking more time to repay the loan – can also keep payments on a more expensive car reasonable, but take care with this method: You don’t want to be making car payments on a car that needs costly repairs or is nearing the end of its useful life.

Find out how much car you can afford with the U.S. News Car Affordability Calculator.

How to Negotiate the Best Price on a Car

A car’s price isn’t set in stone, and negotiating it is a key part of getting a good deal and not overpaying. However, negotiating a car price isn’t something that most people look forward to, and it’s easy to feel like you’re at a disadvantage. After all, your car dealer negotiates deals every day, and you likely only buy a car every few years.

There are steps you can take to negotiate the best price on a new car. Knowing what price you should shoot for, and the available deals and incentives on the car you want are good first steps. It helps to treat the process as a business transaction instead of an emotional one, as does knowing how to make dealers compete for your business. The most important skill in getting the best price on a new car is knowing when to walk away from a bad deal.

If you don’t like to negotiate, you can use the U.S. News Best Price Program to get upfront pricing from a certified dealer on your new car. People who use the Best Price Program typically save thousands off their vehicle’s MSRP.

Read more about how to negotiate the best car price.

How to Get out of a Car Lease

Sometimes, circumstances change and that lease you signed just isn’t working out. Getting out of the lease the right way can save your credit rating and sanity. Getting out of a lease the wrong way can end up costing you thousands in fees.

Getting out of a car lease is difficult because you don’t actually own a leased car. Instead, you’ve signed a contract agreeing to essentially a long-term rental, where you pay for the depreciation of the car that results from your use. If you try to terminate that agreement early, the leasing company will lose money. That’s why lease contracts are difficult to break; leasing companies protect themselves from loss.

You can get out of a car lease by defaulting on it, but that should be your last resort. Defaulting on your lease by not making payments will ruin your credit. Working with your leasing company to go through early termination of a car lease isn’t ideal, since you’ll still likely pay thousands in fees and penalties, but you’ll escape with your credit intact.

If the car you’re leasing is worth more than what you owe on your lease, you may be able to take it to a dealer and sell it. However, you’ll want to make sure you’ll get enough from the sale of the car to pay off your lease, and that your lease allows for this option. You may also be able to take your car back to the dealer and have them help you get out of your lease, provided you lease another car from them. This is a good option if you’re not looking to get out of your lease for financial reasons, but because your circumstances have changed -- maybe you drive a two-seat sports car but have a baby on the way.

There are services that allow others to assume your lease for you, but this tactic comes with its own pitfalls, including fees and risks to your credit if the person who assumes your lease defaults on it.

Read more about how to get out of a car lease.

Car
Calculators

Use our car calculators to calculate monthly payments or figure out which cars you can afford. Plug in the price of a car you would like to buy into the monthly payment calculator, or enter your desired monthly payment into the affordability calculator to get started.

Car Payment Calculator

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Affordability Calculator

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How to
Buy a Car

Get helpful tips on car financing, including advice on how to get a car loan, whether to buy or lease and how to negotiate for a car.

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