There's more to buying a vehicle than the initial cost, even if you pay cash. There's insurance, fuel costs and maintenance. Any new vehicle will have high insurance rates.

Basics of auto financing

Setting out to buy a car with an estimated monthly payment in mind, whether leasing or straight financing, is a sure shot way to pay more than you might otherwise. Determine what you can reasonable afford to pay for a new car.

After budgeting for your auto purchase, check your credit score before you set out actually to buy a new car. You can apply for credit, few months before the purchase because any incorrect or outdated information could lower your score and up the interest rates. Check for misinformation such closed accounts still active, incorrect credit limits, etc. Check for any outdated information. Correct the errors or discrepancies and send copies of the same to the credit bureaus for updating of your credit score. Credit score is based on past payment history, outstanding debt, how long you've had credit, how much new credit you've sought recently and the types of credit you have.

Buying v/s. leasing

To know whether buying or leasing is best for you; give a thought to these questions.

- How many miles do you drive per years - Do you drive 12,000 - 15,000 miles / year. If yes, then leasing might prove to be a costly affair as you might have to pay extra mileage fees.

- If you are ok with having a car payment, the leasing is right for you, as it will allow you to get a new car every few years with out making a substantial down payment.

- If you fail to avoid fender bender, parking lots dings, then buying the car is a better option. Because leased contracts require you to return the vehicle in good shape and fully maintained.

- If you have plans of customizing your car to your choice, then buy the car. Do not lease because, the leasing contract states that you don't own the vehicle and any changes you make could affect the car’s value and the leasing company can ask for compensation.

- If you plan to get married or start a family, leasing a car is not a good option. You future transportation needs might require a minivan or something big to accommodate your growing family. You're likely to pay less for making a vehicle switch than you would under a lease termination.

How much should spend on your new car?

Not more than 15-20% of your monthly income (take home pay). This figure should include payments on any number of cars you own. The amount you can truly afford depends on much more than purchase price - Insurance rates, fuel costs, maintenance, and repairs too play an important role. Insurance rates can vary widely from model to model. Irrespective of whether you make down payment or not, it will affect the size of your monthly payments. Down payment is the proof that you can afford to buy the car.

Loan shopping strategies

- Shop for independent car financing before you bargain price at the dealer's.
- Apply for a loan limit at least a little over what you expect to pay. It means extra flexibility for you at closing time, and you're under no obligation to use your entire loan limit.
- Opt to make your payments automatically. Securing your loan online usually means rate savings. Online lenders usually offer lower rates if you pay electronically.

Benefits of direct financing

Direct financing is a smart route for almost any buyer in the market for any product.

- Walk into any big dealer ship with a guaranteed new or used car loan in hand gives you bargaining power and flexibility.
- Having a guaranteed loan in hand lets you easily avoid the common dealership trap of mixing up vehicle price with financing costs.
- And if you're lucky, dealers can offer you a better rate which is all the more better because a direct car loan comes with no commitment.

Hence arranging outside new car financing before you shop is strongly recommended. While your potential savings are greatest if you plan on buying from a dealership, getting your loan via the internet can still be a big advantage.

Person-to-person auto loans or loan via Internet

While availing of person-to-person auto loans, you determine the loan term and amount that fits your need, apply and lock in your rate. You'll receive a cheque from the lender that can be used to purchase a car from any titled owner or dealership. However simple the process may be, person-to-person auto loans carry more restrictions than traditional financing.

Lenders place more stringent restrictions on person to person auto loans, as funding a loan to unknown seller is quite risky.

If you're buying from a dealer, costs associated with registration, licensing, and tax into your loan principal are easy to wrap up, while in most person-to-person loans you'll be responsible for paying these fees to the DMV before the loan is officially funded.

Person-to-person car loans generally carry higher interest rates and stricter credit requirements; hence your credit will need to be pretty clean to qualify for this type of financing.