What Credit Score Do You Need to Buy a Car in 2021?

Because a credit score is an important indicator for determining a consumer’s creditworthiness when buying a car, those with excellent credit histories tend to have an easier time borrowing money on favorable terms compared to those with lower credit scores. However, industry data shows that high-risk borrowers remain viable candidates for auto loans. In other words, there is no universally defined credit score needed to buy a car.

Read on to learn how your credit score can affect buying a car, plus some tips for purchasing a car with a lower credit score.

What FICO® Score Do Car Dealers Use?

There are a few different scoring models that car dealers may use for determining a customer’s credit score. They may use the FICO Auto Score 10 , an industry-specific model featuring a score range from 250 to 900. The auto industry also may use VantageScore 3.0 or the newer VantageScore 4.0 model, which has a score range from 300 to 850.

No matter which scoring model is used, a bad credit score falls on the lower end of the range and a good credit score sits on the higher end of the range.

What Is the Minimum Credit Score To Buy A Car?

There may not necessarily be a minimum credit score required to buy a car. Consumers with deep subprime credit scores from 300 to 500 have obtained financing for new and used vehicles in the second quarter of 2021, according to the credit bureau Experian’s State of the Automotive Finance Market report for that period. Although the percentage of borrowers in this category is very low, this indicates that even those with the lowest credit scores still may have access to auto financing.

Average APR by Credit Score Ranges

Consumers from all credit score categories have obtained auto loans in 2021, but car buyers with excellent credit histories tended to secure the lowest annual percentage rate (APR) financing, according to Experian’s Q2 report. When assessing what is a good credit score to buy a car, Experian’s data confirms that consumers in the super prime and prime categories obtain the lowest interest rates on average for financing.

Quarterly financing data on new vehicle purchases in the second quarter of 2021 shows the following average APRs by credit score ranges:

•  Deep subprime (300-500): 14.59%

•  Subprime (501-600): 11.03%

•  Near prime (601-660): 6.61%

•  Prime (661-780): 3.48%

•  Super prime (781-850): 2.34%

How to Buy a Car With a Lower Credit Score

Obtaining a loan to purchase a new or used vehicle when you don’t have great credit can be cumbersome, but it’s not impossible. Here are some ways a consumer with poor credit may be able to obtain auto financing:

Make a Large Down Payment

Offering a large down payment on a vehicle purchase may allow car buyers to obtain more reasonable rates and better terms for financing, resulting in more affordable monthly loan payments. By putting more money down at the time of purchase, lenders also may view the loan as less risky, thus increasing your odds of approval.

Get Cosigner Assistance

Buying a car with the assistance of a cosigner is another way to potentially bolster your chance of securing favorable financing. A cosigner agrees to share the responsibility of repaying the loan, effectively promising the lender that if you don’t make the payments they will. If the cosigner is creditworthy, it puts the buyer in a much better position to obtain financing than going it solo.

Consider a Less Expensive Car

Especially if you are buying a car with bad credit, it is important to know how much you can realistically afford to spend — and then stick to that budget, even if the dealer tries to upsell you. Additionally, finding a less costly car will reduce the amount you need to borrow, and it may be easier to get approved for a smaller loan amount than a larger one.

Benefits of Good Credit When Buying a Car

The benefit of a good credit score when buying a vehicle is that you may secure lower interest rates compared to consumers with poor credit. Unless a consumer buys a vehicle outright with cash or receives 0% APR financing, the consumer will eventually face monthly principal and interest payments until they’ve paid off the loan balance in full. Auto financing terms may vary in length, with some maturing at 60 months, 72 months or 84 months.

Car loans with a high APR may cause consumers to pay a long-term premium above and beyond the actual sales price of the vehicle.

How to Monitor and Keep Track of Credit Scores

There are a number of ways you can check your credit score, including through your credit company or another financial institution where you have an account, as well as through a credit service or credit scoring website. Contrary to what you may expect, your credit report does not include your credit score, though it does provide valuable information about your credit history and debts, which is why it can still be helpful to read over your credit report before making a major purchase like a car.

Credit scores can fluctuate over time depending upon financial circumstances, and credit score updates occur at least every 45 days. That’s why it’s important to take a look at where your score stands right before you begin the process of car shopping.

Also keep in mind that it’s common for credit inquiries to occur when you’re shopping around to see what auto loan terms you qualify for. While soft inquiries don’t affect your credit score, hard inquiries, such as those that happen when you’re comparing rates for an auto loan, can ding your score. However, most major credit scores will count multiple car loan inquiries made within a certain period of time — typically 14 days — as one inquiry.

What’s Expected in 2022?

Based on the trends outlined in Experian’s Q2 report for 2021, prime borrowers with good credit in 2022 may continue shifting away from used vehicles in favor of new vehicles. Experian’s research also shows that subprime financing remains at near-record lows, with just a fraction of car loans in 2021 going to consumers in the deep subprime risk category. These trends could continue into 2022.

The Takeaway

While it is possible to buy a vehicle with bad credit in 2021, consumers in the subprime or deep subprime risk categories may want to explore ways of improving their credit scores to help secure financing with more favorable terms. As far as what credit score you need to buy a car, any score is potentially sufficient for obtaining financing.

If you want to check your credit or work to improve your score before buying a car, SoFi Relay is a user-friendly app that allows you to easily monitor and keep track of your credit score.

Stay on top of your credit score with weekly updates.

Photo credit: iStock/tolgart

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.

Source: sofi.com

Buying a Car With a Personal Loan

Buying a car, whether used or new, is a significant financial commitment. And most people probably don’t just happen to have $25,000 to $45,000 — the average prices of used and new cars in 2021 — in cash lying around. That means you’ll likely need to take out a loan to buy your car. Deciding which car to buy and understanding how to determine a car’s value and how that value depreciates over time are all considerations when making an informed decision about a car purchase.

Another important consideration is how to pay for the car. Do you specifically need a car loan to buy a car, or can you buy a car with a personal loan?

The short answer to this question is “yes,” but there are a few things to take into consideration when thinking about buying a car with a personal loan or a car loan.

If you’re buying a new car from a dealership, the benefits of using dealer financing might outweigh the drawbacks. Automakers offer financing on cars purchased through their dealerships, with low or sometimes even 0% APRs for well-qualified buyers, in an effort to compete with banks and other financial institutions.

Banks or other financial institutions may offer different interest rates, terms, and eligibility criteria than dealerships. According to consumer credit information compiled by the Federal Reserve , the average APR on a 48-month new car loan from a commercial bank in the second quarter of 2021 was 5.28%. For a 60-month new car loan from a commercial bank during the same period, the APR was 5.05%.

Lending money for a used car might be seen as a higher risk by a bank, and their interest rates typically reflect that notion. Older model vehicles are generally seen as a higher lending risk by banks than a new model because they might be less reliable and have a greater chance of failure as they age.

Is the Seller an Individual or a Car Dealer?

An individual who is selling a used car is not likely to offer financing, so a car buyer in that situation would likely need to find their own source of funds.

As mentioned above, banks do sometimes offer car loans on used cars, but the interest rate is dependent on multiple factors. In addition to looking at the applicant’s creditworthiness, which is typical of any loan application, the make, model, and age of the car are also taken into account.

When considering a personal loan to purchase a used car, details about the car aren’t considered during the application process. As the name implies, a personal loan can be taken out for any number of personal expenses — home improvements or a vacation, for example — whereas a car loan can only be taken out to pay for a car.

Differences Between Car Loans and Personal Loans

In essence, a car loan works much like a mortgage. It is paid for in monthly installments and the asset isn’t fully yours until the final payment is made. The car is the asset that secures the loan, which means if you default on payments, the lender could seize your car. The car’s title typically remains with the lender until the loan is paid in full.

Funds from a personal loan can be much more flexible, and can be used not just for purchasing a car, but for the other costs of owning a car as well. Personal loans can be secured or unsecured, with either fixed or variable interest rates. An unsecured personal loan is not tied directly to an asset, i.e., collateral, as a secured personal loan is, so there is no asset for a lender to seize in the case of default. Transferring a car’s title from one owner to another differs from state to state and is generally handled by each state’s department of motor vehicles.

While a car loan from a dealership might be able to be finalized quickly in some cases, car buyers who have a personal loan approval in hand before they go to the dealership can take a step out of the negotiation process.

Refinancing a car loan with a personal loan might be an option in some cases. Perhaps you’ve improved your financial situation since taking out your car loan and you can now qualify for a lower interest rate. Or you’d rather have a shorter-term loan than you currently have, and refinancing with a personal loan might accomplish that.

Determining the Value of a Car

Whether the car you’re considering is new or just new to you, there are a number of well-respected pricing guides to consult for an appropriate price range once you narrow down your car choices.

•   Edmunds offers a True Market Value guide.

•   Kelley Blue Book has suggested price ranges for various cars (particularly useful for used cars).

•   The National Automobile Dealers Association’s guide offers information about new and used cars, including classic cars.

•   Consumer Reports provides detailed reviews and reports about specific makes and models.

These resources simply provide a price range for the car you want. Calling car dealers for price quotes or estimates and looking for any purchase incentives or dealer financing offers are good ways to be prepared before you walk into a dealership.

Negotiating the Car Purchase

Once you know which car you want and what you can afford, how do you pay for it?

For most of us, the negotiation part of buying a new car is the most daunting. This is why you want to go in understanding the price range for your desired car — ideally, you’ll also be equipped with a few comparable quotes from other dealers.

When speaking with a car salesperson it’s a good idea to ask for the actual sales price, which can include taxes, fees, and other charges that may vary depending on the state and the dealership where the car is purchased.

Some car salespeople might talk in terms of monthly payments instead of total purchase price. But talking about monthly payments and payment periods can make it difficult to keep track of the overall price of the car.

Test-driving, negotiating, and finishing paperwork will take some time, and that’s okay. Take your time with all that goes into a car purchase and don’t let an enthusiastic salesperson rush you into making a decision that’s not a good one for you.

What Are the Costs of Car Ownership?

The sticker price, or even the possibly lower negotiated price, doesn’t reflect the true cost of car ownership. AAA’s annual “Your Driving Costs” study found the average cost of owning and operating a new car in 2021 is nearly $10,000 annually. The three biggest expenses of car ownership are depreciation, fuel, and maintenance and repairs. The study found that small sedans were the cheapest to operate, while half-ton pickup trucks were the most expensive.

Depreciation is the decline in value of an asset over time, and it tops the list of largest annual expenses of car ownership. A new car begins to depreciate as soon as it’s new owner drives it off the lot, and the depreciation continues to increase over time. Depending on the make and model of the car, how many miles it’s driven annually, and other factors, a new car could depreciate

•   10% in the first month.

•   20% in the first year.

•   40% after five years.

Another factor when considering the true cost of your car is the potential increasing maintenance costs over five or 10 years. Proper maintenance of a vehicle can go a long way toward not only keeping it in good condition, but can make it safer for the driver and passengers, as well as other drivers on the road.

The Takeaway

The biggest ongoing cost of the car, though, is the cost of the car itself. Choosing what type of loan — car loan or personal loan — generally corresponds to what type of car you’re buying, what interest rate and terms you might qualify for, and what works best for your specific financial situation. Getting pre-qualified for a personal loan before you begin shopping for a used car may help direct your car search toward vehicles that are affordable and fit your lifestyle.

SoFi Personal Loans have low rates and can be used for a variety of purposes, including purchasing a car.

Check your rate on a SoFi Personal Loan.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

Source: sofi.com

When Should You Pay in Cash?

It may seem old school to whip cash out of your wallet to pay for your purchases. But there are times when good-old greenbacks can actually be a better way to pay than tapping your credit card.

While credit can be a quick and convenient way to pay, using cash for many of your routine transactions can be more secure. Paying in cash can also help you save money, stick to your monthly spending budget, as well as duck savvy marketers.

Read on to learn when it’s better to pay with cash, and when plastic may be the ideal way to go.

The Benefits of Cash

You May Get a Discount

You may be rewarded for paying cash, like paying a lower price at the gas station or when you get take-out at a restaurant.

Many businesses pay a fee for accepting credit and debit cards, so they may be willing to charge you less if you’ll pay in cash. If you frequently fill up your tank, saving even 10 to 20 cents per gallon can add up to significant savings over time.

It Can Help You Avoid Overspending

When you tap or swipe your credit or debit card, you don’t physically see your money leaving your account. Since there’s no sense of immediacy or consequence, it can be easy to spend more than you originally intended.

If, on the other hand, you leave home with only the amount of money you need for the day in cash, your spending is likely to be more mindful and you may have a better chance of sticking to your budget.

Recommended: 9 Tips to Stop Overspending

There are Fewer Security Risks

Yes, someone could rob you when you are carrying cash. However, there is less risk of identity theft or your information getting stolen when you pay with cash vs a debit or credit card.

You Can Avoid Fees

Cash is a one-shot deal — the purchase you made won’t end up costing you a penny more. With credit and debit, however, you can end up paying additional charges down the line, from late fees and overdraft charges to interest payments on debt.

Recommended: How to Avoid Overdraft Fees

Times When You Should Pay in Cash

Your Tab is $10 or Less

It can be a good idea to carry cash for small purchases. Many retailers have a minimum amount of money you must spend in order to use debit or credit. If your purchase is under, you’ll have to throw in extra things (you probably don’t need) to meet the minimum.

When Shopping at a Small or Local Business

Small businesses often offer discounts for cash payments, since it helps them save on bank fees. This can be an easy way to support your local businesses and save a few dollars at the same time.

You Want to Keep Advertisers at Bay

You may have noticed that after you buy something with a credit or debit card, you often get hit with ads and offers for similar products. That’s because retailers can track their customers’ spending and share their information with a third party, who can then target them with ads.

This can be annoying, and also lead to more spending if you’re enticed by an offer. Using cash makes it much harder for businesses to collect and share your information.

Times When You Shouldn’t Pay With Cash

Buying a House

If real estate is hot where you live, you may be tempted (if you can) to plunk down cash to ensure you get that dream house before someone else does.

While buying a home with cash vs getting a mortgage may get you the house, it may not be the most prudent move in the long run, especially if it wipes out all of your savings.

A mortgage has tax benefits and timely payments can help you build good credit. Also, there could be better uses for all that cash, like investing in the stock market or elsewhere.

Business Expenses

If you own your own business, have a side gig, or do freelance work, it can be better to use credit (or even a check) to pay for business-related purchases. You’ll likely want a paper trail so you can deduct these expenses on your tax return.

Another potential perk of using credit is that it may offer some purchase protection in event something you buy for your business that breaks or gets stolen soon after you purchase it.

Paying Service Providers

You may think a service provider, whether it’s an electrician or an auto mechanic, did a good job, but only time will tell. Using credit can offer you some protection in the event that you experience problems with a service after you’ve already paid for it.

Renting a Car

Often your credit card will provide insurance on car rentals, but only if you use that form of payment, as opposed to debit or cash. Using credit for the car rental can help you avoid paying for something you don’t need to purchase.

Recommended: 10 Tips for the Cheapest Way to Rent a Car

You’re Looking to Build Credit

If you need to build your credit score, one way to accomplish that is to use your credit card on a regular basis and show that you’re responsible by paying what you owe each month, consistently and on time.

When Buying Electronics

Using your credit card instead of cash for electronics can be a big advantage if your credit card offers extended warranties as a cardmember benefit. This allows you to get peace of mind without having to pony up for the store’s warranty. And, you can simply pay off the balance as soon as the bill comes.

You’re Looking to Track Your Spending

If you’re looking to see where your money is going so you can track your spending and set up a monthly budget, it can be easier if you pay with credit or debit.

Your financial institution may even offer you a pie chart of your spending, broken down into categories. Seeing everything in black and white can help you become better at budgeting.

Alternatives to Using Cash

Cash vs Credit cards

A credit card can be a good alternative to cash if you are able to pay it off in full every month, and you do. If managed well, credit cards (even secured credit cards) can help you build credit to buy a home or another large purchase in the future.

Cash vs Debit cards

A debit card can be a good substitute for cash, as long as you know there’s money in the bank. By using a debit card, you’re not incurring any new high-interest debt. As long as you are not incurring any overdraft fees, or withdrawing money from ATMs that charge high fees, debit cards can be a simple way to make purchases.

Cash vs Financing or Loans

It can sometimes be better to pay for a major purchase, like a car or a home, with a loan rather than cash if the interest rate is lower than what you could likely earn by investing that money.

However, you’ll also want to keep in mind that there is risk involved in investing in the stock market, so there is always a chance that you could lose money.

Recommended: Leasing vs. Buying a Car: What’s Right for You?

The Takeaway

Even as we move towards a more cashless society, it can be important to keep cash in your wallet and use it for certain everyday expenses.

Paying in cash can help you garner discounts at local businesses, stick to your budget, avoid paying overdraft and interest fees, protect against identity theft, and keep advertisers from targeting you.

There are times, however, when it can make more sense to pay with credit rather than cash. These can include: when you’re making business purchases and buying electronics and/or you’re looking to build credit or closely track your spending.

Another easy way to keep close tabs on your everyday spending is to open a SoFi Money® cash management account. With SoFi Money, you can easily track your weekly spending — and make sure you’re not going overboard — right in the dashboard of the app.

Learn how SoFi Money can help you keep better track of your money today.

Photo credit: iStock/towfiqu ahamed

SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Source: sofi.com

How to Sell a Car You Still Have a Loan On

When someone wants or needs to sell a vehicle, but they still owe money on it, the process can be different from selling one without a loan balance — in other words, with a vehicle that’s been paid off in full. This post will guide you through how to sell a car with a loan under a few different scenarios and then will offer tips on buying the next vehicle.

How to Sell a Car You Still Owe Money On

At a high level, selling a vehicle with a loan has three main steps:

1.    Gather important info.

2.    Determine if you have positive or negative equity.

3.    Pick a selling option.

We’ll explore each of these steps in more depth next.

Gather Important Info

First, get a sense of what the car is worth. This will depend upon its condition, so objectively look at your vehicle. How clean is it? How well has it been maintained? What does the body and interior look like? Examine other used cars like yours for sale and see how they’re priced.

Look at used car valuation guides, as well. They will have different values for trade-ins (when working with a dealership) than for private-party sales (when selling to an individual), and will also list retail values. Look at the one that will fit the situation.

Also, verify the payoff amount on the vehicle’s loan. This will include the principal balance plus any accrued interest and is often available online or can be obtained by calling the lender. During the conversation about selling a vehicle with a loan, you can also find out how to send the payoff amount to the lender and when the lender wants to receive it (before or after the sale of the car).

Recommended: 31 Ways to Save Money on Car Maintenance

Determine If You Have Positive or Negative Equity

The vehicle’s equity is the difference between the resale value and the amount owed on it, and this number can be positive or negative.

Let’s say that a vehicle is valued at $20,000 with a loan amount of $10,000; that car has a positive equity amount of $10,000. If, though, the vehicle is valued at $20,000 and the outstanding loan amount is $25,000, then it has negative equity of $5,000. Loans on cars with negative equity are referred to as “upside-down” or “underwater.”

So, when figuring out how to sell a car with a loan, the processes will differ based on whether the vehicle has positive or negative equity as well as the selling option you select.

Pick a Selling Option

If you have a car with an outstanding loan balance — and it isn’t practical or even possible to pay it off — then selling a car with a loan can typically be handled in one of three ways:

•   Selling it to a used car dealership.

•   Selling it privately to another person.

•   Trading it in.

Selling a Car to a Used Car Dealership

If a car dealership will buy used cars without requiring that you buy one from them during the transaction, then the process will probably be pretty straightforward. The dealer will offer you a certain dollar amount and, if you agree, they will pay off the lender in exchange for getting the vehicle’s title.

If there is positive equity on the vehicle, then you’ll get the money that remains after the loan balance is paid off. If it’s a negative equity situation, then you’d need to pay the difference between what the used car dealer is willing to pay and what it takes to pay off the loan.

For example, If a dealer offers $15,000 on a vehicle that has a $10,000 loan, then the dealer would take care of the loan payoff and provide the person selling the car the remaining money (minus any fees involved). In a negative equity situation, for example, if the vehicle’s value is $10,000 and the outstanding loan is $13,000, then the seller would need to chip in the difference (in this case, $3,000 plus any fees) to complete the sale and transfer the title to the buyer.

Recommended: Smarter Ways to Get a Car Loan

Selling a Car Privately

With a private sale, you might get more money than you would from a used car dealer (who needs to re-sell the vehicle at a profit), but you’d also need to take on more responsibility for managing the sale. This includes the transfer of title and payment of fees among other duties.

Steps to take include the following:

•   Get the current loan payoff from the lender (there will likely be interest owed beyond the principal amount).

•   Find out what paperwork they’ll need and how they want the process to work.

•   Have the buyer follow the lender’s procedures when paying for the car.

From the lender’s perspective, they want to ensure that they get paid. So, as just one possibility, they may have a buyer pay them the agreed-upon price for the vehicle. If it’s more than what’s owed, then the lender could give you the overage. If it’s less than what’s owed, you could give the bank the difference between the price and loan amount.

When selling a car with a loan privately, you’ll also need to handle any fees and forms with the motor vehicle department of your state.

Trading In a Car You Still Owe Money On

As a third possibility, you could trade in the car with a loan balance to a dealer as part of purchasing either a new or used car. The dealer will offer a certain amount of credit for the trade-in vehicle and if its value is more than the loan amount, that difference would go towards the purchase of the replacement vehicle.

If the loan amount is higher than the value, then the dealer may agree to combine the vehicle’s negative equity with the loan for the replacement vehicle. If this is the chosen route, the term may need to be extended to create affordable payments and this will potentially lead to more interest being paid on the new loan.

Recommended: Leasing vs. Buying a Car: What’s Right for You?

The Takeaway

Selling a car with a loan is a little different from selling one that’s paid in full. When thinking about how to sell a financed car, it’s easier to do so if you have positive equity in your car but still can be doable with negative equity. Some options include selling to a dealer or to an individual or trading in the vehicle towards another one.

Setting up a SoFi Money® Vault as a car fund can be a good option for saving towards a new car if you’re considering selling your current vehicle. Account-holders earn interest on their deposits and pay zero fees, so more of your hard-earned money can be put toward your financial goals.

Learn how you can save, spend, and earn all in one place with SoFi Money.

Photo credit: iStock/Sakkawokkie

SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
The SoFi Money® Annual Percentage Yield as of 03/15/2020 is 0.20% (0.20% interest rate). Interest rates are variable subject to change at our discretion, at any time. No minimum balance required. SoFi doesn’t charge any ATM fees and will reimburse ATM fees charged by other institutions when a SoFi Money™ Mastercard® Debit Card is used at any ATM displaying the Mastercard®, Plus®, or NYCE® logo. SoFi reserves the right to limit or revoke ATM reimbursements at any time without notice.

Source: sofi.com

Should I Buy or Lease a Car?

After buying a home, one of the next major purchase decisions (and expenses) is a car. The latest headlines, including a recent article in The Wall Street Journal titled “Buying a Car Now Is Brutal, talk about how the market for cars has been turned upside down due to lack of inventory and parts availability and the transaction price of used cars is up 24% from June 2020. 

With minimal deals to be had, buying a car now appears to be more challenging than it was in the past.

Whether to lease or buy can depend on your circumstances and preferences. I made a rough calculation a few years ago while having a discussion with a co-worker (assuming the car market is behaving normally) and the conclusion was whether you bought or leased the exact same car, you would likely break even at about the three-year mark. Before that point, you may spend less on a lease, but after that, you’d tend to come out ahead by buying. Why? Because the lease payments take into account the big depreciation hit you experience with any new car, which is highest in the first two to three years. If you lease, you are still paying for the depreciation.

For example, if you buy a $50K car for cash, after three years you will be able to sell it for say $30K, which means you “spent” $20K owning the car for those three years. If you lease the car, your three years’ worth of lease payments will likely be very close to the same $20K, due to the depreciation factor. If you buy and keep the car longer than that, it continues to depreciate — but at a declining rate over time. So, owning the same car for six years is then cheaper than leasing for six years. The break-even point is around three years.

So one way to save is to buy a two- to three-year-old car that has already taken the initial depreciation hit, keep it for seven to 10 years, and hope the repairs are not expensive.

Things to Consider When Buying a Car 

Do You Want to Pay Cash or Finance?

Depending on interest rates, it may make sense to pay cash if you have sufficient cash available. If you have $50K sitting in cash earning 1% but your loan would be at 6%, it may make financial sense to pay cash. If the $50K is all you have in emergency savings, you may not want to tie up funds in a depreciating asset and prefer to go the finance route, especially if you are still working. Another consideration would be the probability of you replacing that $50K with new savings once it has been used to buy the car. Some people psychologically have a harder time paying themselves back tha n paying the bank. Interest rates for new cars are usually lower than for used cars and often the dealer may offer very low-interest financing.

If your $50K is invested in the equity market and you expect a 7% return or more over time (although the market can go either way), you may prefer to finance and leave your money to grow.

Another important aspect for retired clients is if your money is all in an IRA or other retirement account — taking out a $50K lump sum to buy a car may actually be a $70K withdrawal once you factor in taxes and may push you into a higher tax bracket for that year.

Maintenance and Depreciation Costs

If you are buying a car, you would want to check into what is covered under warranty and for how long. Anything not covered would be your responsibility and an extra expense.  Some warranties on new cars are not worth the paper they are printed on (expensive mechanical systems that tend to give trouble are sometimes not covered) and often the dealer will try and talk you into purchasing an extended warranty.

Should you buy an extended warranty? Well, it’s a gamble that works similar to insurance, but you would want to understand the types of repairs you are insuring against to make sure the coverage is worth it (they don’t cover everything). Some warranties are expensive, and it may make sense to just save the cash you would pay for the warranty in case the car needs repairs. If you cannot afford to repair the car if you had a costly problem, then it may make sense.

Another point to consider is if you have an accident with a car you own, when you try to resell it you are going to get a lower value for it. Some insurance policies offer coverage for this possibility. Before choosing a car, check out resale values for that type of car so when you are ready to sell, you will have an idea on the future valuation.

In order to get a sense of how much a car costs, TrueCar.com or Edmunds.com are great tools. TrueCar aggregates all the new or used cars in the area based upon factors you determine (make, year, model, etc.).

Most car dealers have some negotiating room, which can be up to a couple thousand dollars, especially if a new model is coming out, so do your research before negotiating.

Things to Consider When Leasing a Car 

Lease Commitment

If you tend to keep cars for a long time, purchasing may be the way to go, but if a shiny new toy every few years is your thing, you might want to look into leasing. If you believe your circumstances may change, such as a new baby on the way, elderly parents coming to live with you or a future move from a summer climate to a winter climate, leasing provides more flexibility since you are not committed to the car for more than two to four years. Also, you will likely be able to get more car for your money with a lease.

There is usually an upfront cost to leasing, which is an amount due at signing (tax, tag, title, down payment, delivery costs, etc.). This lump sum usually reduces your monthly payments and may be required depending on your credit. Some dealers offer $0 down, but all this does is increase your monthly payments; it is all a numbers game — a higher down payment means lower monthly payment and vice versa.  To get an idea on what you are really paying each month on average, you may want to divide the down payment by the months of the lease.

Maintenance & Mileage

Some brands have scheduled maintenance included, which can be quite convenient. However, there are also several coverages, such as tire protection and dent and scratch insurance, that you can buy that will increase your lease payment. Most standard lease offers allow 10,000-mile limits per year. If you drive more than 10,000 miles, this will also increase your payments on the front end, or on the back end when you return the car you will be required to pay for the extra miles.

 It is usually cheaper to pay for the miles before you return the car, and in some cases there is a time frame (you have to buy the extra miles three months before the end of the lease). Extra mileage can range from around $0.15 to $0.30 per mile and can add up fairly quickly. At $0.30 a mile 3,000 extra miles will cost you $900.

So, if you drive more than 15,000 miles annually, purchasing a car maybe cheaper for you — and if you are driving 25,000 miles a year this can get restrictive and expensive. Keep in mind even on a purchased car, the increased mileage will fetch you a lower sales price when you are ready to sell anyway.

Insurance Costs

Leases also require full insurance coverage to protect you and the leasing company, so if you want to pay for less insurance, purchasing may be a better alternative. Additionally, leased cars usually have GAP insurance built in; this pays the difference between what you owe and what your car is worth if stolen or totaled in an accident. Loans do not usually have this coverage, so you would need to check with your insurance company to see if this is something they offer.

There are some companies/websites that will allow you to lease a car on a month-to-month basis, which may be beneficial depending on your circumstances. If you have to terminate your lease early, www.swapalease.com is a useful website that I have used several times in the past and found very efficient; however, not all car brands are supported.  

Tax Benefits

Lastly, if you own your own business and can use lease payments or mileage allowance as a tax write-off, this may be another factor to consider.

Senior Financial Adviser, Evensky & Katz/Foldes Financial Wealth Management

Roxanne Alexander is a senior financial adviser with Evensky & Katz/Foldes Financial handling client analysis on investments, insurance, annuities, college planning and developing investment policies. Prior to this, she was a senior vice president at Evensky & Katz working with both individual and institutional clients. She has a bachelor’s in accounting and business management from the University of the West Indies, she received an MBA at the University of Miami in finance and investments.

Source: kiplinger.com

Can You Buy a Car with a Credit Card?

You can buy a car with a credit card in certain circumstances. But it may be smart to ask yourself if this is the best way for you to purchase your vehicle. This post will take you through the pros and cons of buying a car with your card, as well as provide information about what you can expect from the process.

Buying a Car with a Credit Card

You’ve decided how much you want to spend on a new car, and you’ve negotiated a fair price with a dealer. But before slapping down your plastic to purchase a new or used car, you’ll first need to check with your car dealership to verify that they accept credit card purchases, which cards they accept, and how much of the total purchase price they will allow you to charge.

If you go to a dealer that won’t accept credit card purchases, or limits the amount, you’ll have to decide whether to pay another way or to go to another place that sells the car you want and allows credit card purchases.

However, if you’ve selected a car at a dealership that takes credit card payments, your next step is to check your credit limit to determine whether it’s high enough to use one card, or whether you’ll need to spread out the purchase over multiple cards.

If your combined limits aren’t enough, you could pay the difference with a cashier’s check and still reap some of the rewards-point benefits available through credit card use. Or you could ask your credit card companies to increase your limits.

It also makes sense to notify your credit card companies that you intend to use your credit cards to make a large purchase. If you don’t regularly make large purchases on your credit cards, the transaction might get flagged as potentially fraudulent and could get declined.

At a car dealership that does let you pay for a car with a credit card—or at least a portion of it—you might consider using a rewards credit card for that portion. If you have cash to pay the charge before it starts accruing interest, you’re basically getting a zero-percent, short-term loan while taking advantage of the credit card perks.

Why Some Car Dealers Don’t Accept Credit Cards

On the surface it might seem odd that auto dealers wouldn’t accept credit cards. Afterall, they want to make a sale, right? Of course they do, but they, like other merchants, must pay processing fees for each credit card transaction they make. These fees tend to be around 2%, and they can add up pretty quickly when you consider that cars can cost in the tens of thousands of dollars. By rejecting credit cards, dealers can save themselves the expense and hassle of paying these fees.

If a dealer that normally doesn’t allow credit card purchases makes an exception, expect them to tack on convenience fees of 2% to 4% to help them cover the cost of the transaction. Pay close attention to these fees because they may offset any benefit you might gain from using a rewards card.

Pros of Car Buying With a Credit Card

Under certain circumstances, using a credit card to buy a vehicle can be an excellent strategy to consider, especially if you have money in the bank to pay off the balance in full when your statement comes.

In this scenario, you’ll have a fast and easy way to purchase your car of choice and, depending upon the credit card, you may earn rewards points, something you wouldn’t get if you simply used a cashier’s check to buy the car.

You may have slightly longer to pay off your purchase if you use a credit card that has a zero percent interest rate over a certain period of time, such as six months. In order to avoid interest payments, you must finish paying off your vehicle in that time period. This strategy may be riskier than paying off your full balance immediately. If, for some reason, you can’t pay the balance off within the introductory no-interest period due to unforeseen circumstances, then the card will revert to its regular rate, which may be quite high.

If that happens, the situation can go downhill from there, because some credit card companies will then charge the full interest rate on the entire purchase, not just on the remaining balance. So, in that case, nothing was free and you’ll end up paying a high interest rate on the total balance.

Cons of Car Buying With a Credit Card

The biggest reason not to buy a car with your credit card is that credit card interest rates are typically much higher than other available options. And in some situations you might get stuck with some costly fees.

For example, let’s say that your strategy is to purchase a car on your current credit cards, then transfer the balance to a zero-interest credit card. Besides the challenges listed above, you may add transfer balance fees to the mix. These fees can be as high as 5%, which, on a $20,000 car, is $1,000.

Here’s something else to consider. Having different kinds of debt can actually help with your credit score, so using an installment loan, such as a traditional auto loan, to buy your car instead of a credit card may be helpful to your overall long-term financial situation. And if your credit score is good enough to gain approval for an auto loan with lower interest rates than the average credit card’s rates, you’ll be coming out ahead.

Other Options for Buying a Car

If you decide to finance some or all or all of your auto purchase, you can apply for a car loan through the dealership or other lenders. Auto loans are typically secured loans that use the vehicle as collateral. So, if you fail to make payments, your lender has the option to repossess the vehicle to cover some of your debt.

Dealers are often able to get same-day financing approved, but there may be some pressure to buy while the salesperson takes advantage of your excitement. Banks and private lenders may take longer to approve an application, but sometimes offer better deals on terms or interest rates. Taking emotion out of the equation when buying a car will allow you to compare rates and terms to get the best deal for your financial situation.

You may also want to consider buying a car with a personal loan, which is an unsecured loan that’s not backed by collateral. Personal loans can be used to cover many expenses, including the cost of buying a car. Because they are unsecured, interest rates on personal loans may be higher than other auto financing options, depending on the applicant’s creditworthiness.

The Takeaway

If buying a car is in your future, and you’re ready to start saving, a good move may be to start saving in an account like SoFi Money®, a cash management account where you can save, spend, and earn all in one place.

You can easily create vaults within your SoFi Money account, each for its own purpose (like one for a car fund).

Get started with SoFi Money today to save for your dream car.

SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
The SoFi Money® Annual Percentage Yield as of 03/15/2020 is 0.20% (0.20% interest rate). Interest rates are variable subject to change at our discretion, at any time. No minimum balance required. SoFi doesn’t charge any ATM fees and will reimburse ATM fees charged by other institutions when a SoFi Money™ Mastercard® Debit Card is used at any ATM displaying the Mastercard®, Plus®, or NYCE® logo. SoFi reserves the right to limit or revoke ATM reimbursements at any time without notice.


Source: sofi.com