How to Save Money on a New Car

After a house and a college education, a new car is one of the largest purchases that people make. Some people choose to buy a car outright and borrow money to pay for it while others “rent” a car by leasing it for a specific length of time. For each method of car purchasing, there are ways to lower the cost:

Car Loans

¨      Save up a large down payment and borrow less money

¨      Shop around for the lowest interest rate; compare at least three lenders

¨      Improve your credit score to obtain a lower interest rate loan

¨      Wait for seasonal sales to buy a car for less

Car Leases

¨      Try to negotiate seemingly fixed fees (e.g., acquisition and disposition fees) and the money factor (interest)

¨      Limit miles driven to stay under the mileage cap

¨      Take good care of the car to avoid “wear and tear” fees

¨      Do not terminate the lease early

People who lease cars and car buyers who are “upside down” and owe more than their car is worth should also consider gap insurance. Gap insurance covers the difference (gap) between the amount owed on a car loan or lease and the amount that insurance will cover if a car is totaled or stolen.

Of course, another option to buy a car is with cash, although many people cannot afford to do this. In this case, no interest is charged for a loan or as the "money factor" in a lease. For car buyers who can afford to pay cash, the better option is a matter of opportunity cost. If interest rates are very low and savings and/or investments can earn more than the interest paid to buy or lease a car, it may still make sense to use a loan or lease and keep your cash invested.