Buy vs. Lease
What You Need To Know About Financing Your Vehicle
Kia Motors Finance Company* and your independently owned and operated Kia dealer care about helping you have the best vehicle purchase experience possible. We want you to be an informed consumer to make the best choices about purchasing and financing a vehicle. This brochure provides essential information about vehicle financing. We hope it will help enhance your vehicle purchasing and financing experience.
*"Kia Motors Finance Company" and "KMFC" are business names used by Hyundai Motor Finance Company where permitted by law pursuant to an agreement with Kia Motors America, Inc. Financial services are not offered under the "Kia Motors Finance Company" and "KMFC" names in Kansas, Massachusetts, Vermont, or Wisconsin.
Steps To Take Before You Go To The Dealership
1. Know your credit worthiness -- it may affect your cost of credit
Creditors generally use the same kinds of objective measures of creditworthiness. The better your credit report and score, the lower the interest rate you may obtain.
- Most creditors emphasize your credit payment history as shown in a credit report and credit score from a credit bureau, such as Experian (888-397-3742 or www.experian.com), Equifax (800-685-1111 or www.credit.equifax.com) or TransUnion (800-888-4213 or www.transunion.com).
- Your credit report shows credit information about your existing and past debt, the outstanding amounts, monthly payment amount, and whether you have paid on time, or if you have not repaid debts.
- Your credit report does not include information unrelated to your credit, such as your race, ethnicity, religion, or medical history.
- Your credit score is a numerical value assigned to information in your credit report.
- Your credit score can vary by bureau, because not all creditors report to all three credit bureaus.
- You should obtain a copy and read your credit report before you apply for credit.
- You may be entitled to an annual free credit report. Go to www.annualcreditreport.com to order your copy from each of the credit bureaus.
- You may be entitled to a free credit report under other circumstances. (For more information, go to the FTC's website at www.ftc.gov.)
- You may also purchase your credit score for a reasonable fee.
- If your credit report contains errors, you have the right to get them corrected free of charge by the credit bureau.
- You may be turned down for credit or pay a higher interest rate if your credit report reflects negative information such as a repossession, bankruptcy or history of slow payments.
2. Improving your credit worthiness
Take an active role to manage your credit score as you would any financial matter. Your credit score can be improved by developing long-term habits that include:
- Pay your bills on time, every time. Credit scoring models reward prompt payments.
- Don't apply for credit you don't need. Scoring systems often view numerous loan applications or unused lines of credit as signs that you are overextended or could become overextended.
- Make sure your credit report is accurate. Check your credit report at least once a year and have any errors corrected immediately.
- Contact the credit bureaus for more ideas on ways to improve your creditworthiness.
3. Consider other factors that may determine your cost of credit
- If the vehicle you are purchasing secures your loan or retail installment contract, your cost of credit may vary based on the amount financed, the amount of your down payment, whether the vehicle is new or used, and the vehicle model.
- Your income, down payment and debt to income ratio may also affect the interest rate you obtain.
- The total number of payments (term), such as 48 months or 60 months, may also affect your cost of credit. Lower interest rates may be available for shorter repayment periods.
4. Decide how much you want to pay each month
- Consider what monthly payment fits within your budget, based upon your income and your expected expenses.
- Remember to allow for insurance, taxes, title, registration and vehicle maintenance costs when estimating the costs of ownership.
5. Do your homework
- You may finance your vehicle by entering into a retail installment contract with your Kia dealer or you may seek a loan directly from a bank, credit union or other source. It's your choice.
- Understand how retail financing generally works -- by reviewing this brochure or material from other sources.
- Find out what interest rates are currently available. Different creditors may offer credit at different rates and terms. Creditors usually offer their best interest rates to applicants with the best creditworthiness, with higher rates for less creditworthy applicants.
- Understand your cost of credit. It is measured in two ways: (1) The Annual Percentage Rate, or APR, is the cost of credit on an annual basis and is based on the interest rate as well as other charges for the credit. (2) The Finance Charge is how much the credit costs expressed in a dollar amount.
- Learn about possible special low interest rate programs (such as 0.0% APR), which may be offered for a particular make or model.
- Sources of information include your Kia dealer, the Internet, newspapers and magazines, the library, your family or friends, and other creditors.
6. Gather items you may need to make a credit application at the dealership
Have the following items available with you to assist in the application process.
- Driver's license for identification purposes.
- Employment and salary information, including paycheck stubs.
- Information about other sources of income, including alimony, child support or retirement income.
- Information about your bank accounts, credit card accounts and other debt you may have.
- Personal references with phone numbers and addresses.
- Proof of insurance.
- Sometimes you'll need your prior address information and employment history.
At The Dealership
1. Understand your options
- Your Kia dealer can tell you about the financing sources that the dealer may use.
- Ask the dealer about current interest rates.
- Ask the dealer whether there are any manufacturer supported special financing programs available for certain vehicle models.
2. Making and financing your Kia purchase
- You and the Kia dealer agree upon the price of the vehicle, the value of your trade-in, the cost of any extra features, and the APR of your contract. These terms are negotiable.
- Remember that the total cost of credit will be based on everything you finance, including taxes, vehicle service contracts, credit insurance, GAP premiums, and other options you choose.
- The monthly payment should fit your budget, but should not be the only factor in deciding on credit. Consider all terms of your financing and purchase.
- Confirm your APR.
- The dealer can help you look at several options if the monthly payment amount is too high:
- Make a higher down payment to reduce the amount financed
- Choose a different vehicle model
- Reconsider the vehicle accessories or insurance products
- Consider leasing the vehicle rather than purchasing
- It's up to you to let the dealer know what features or aspects of the vehicle or financing are important to you. The dealer wants you to be satisfied with your purchase and financing. The dealer has access to several credit sources, including some creditors that consumers cannot finance with directly, and may be able to find rates and terms that might be better than you could find on your own.
How Retail Financing Works At The Dealership
You make a credit application
To finance the purchase of your vehicle at the dealership, you will make an application for credit with the dealer. You will give the dealer permission to see your credit report and obtain other credit and employment information.
You enter into a retail installment contract with your Kia dealer
You will enter into a retail installment contract directly with your Kia dealer. The dealer is the seller/creditor and you are the buyer/debtor. You should review and agree to all the terms of the contract, including the amount financed, the APR, the number of monthly payments and the monthly payment amount.
Consider your cost of credit
Your Kia dealer may be able to provide competitive rates to finance your purchase, because there may be several credit sources competing for the dealership's business.
Your dealer may sell the contract to Kia Motors Finance Company ("KMFC"), or another creditor
After you and your Kia dealer sign the contract, the dealer may sell the contract to KMFC or some other financing source. Some dealers may keep the contract and have you make the monthly payments to the dealer, but most dealers sell their contracts. If your contract is sold, you will make the monthly payments to the creditor who buys the contract. This creditor is also called the "assignee" and the sale of your contract is referred to as an "assignment." Except for changing the creditor you make payments to, selling your contract will not change its terms.
Your dealer is a locally owned, independent business
Your Kia dealer is an independently owned and operated business, part of your local business community. The dealer is not part of the manufacturer or any financing source and is not required to sell your contract to KMFC or any other financing source.
The dealer may be paid a fee for the contract
The financing source that buys your contract from the dealer usually pays the dealer a fee for your contract. This amount may be a flat fee or a percentage of the amount financed. This fee is sometimes called "participation."
This payment is between the creditor that buys the contract and the dealer. It does not change any of the contract terms that you and the dealer have agreed upon. The fee compensates the dealer for its time, effort, resources, and overhead as well as for services performed on behalf of the purchaser, such as recording the lien on the vehicle's title. In some cases the fee compensates the dealer for taking on a financial risk, because after a contract is assigned, under certain circumstances, the dealer may be obligated to buy it back. In addition, the dealer offers you the convenience of financing with the dealership directly. For these reasons, the dealer is compensated by the purchaser. Most states do not limit the fee paid to the dealer, although some states have limits.
Preparation is the key.
Financing a vehicle purchase can be done in the convenience of your Kia dealership. Being prepared and understanding the process will enhance your financing experience.
Frequently Asked Questions
How is my APR [Annual Percentage Rate] determined?
Your APR is set between you and the dealer. Your creditworthiness and the other terms of your contract (such as the number of payments, your down payment, the amount you are financing) may affect your APR. The fee that a potential purchaser might pay to the dealer to buy your contract can also affect your APR.
The dealer asked me to sign a credit application, which says Kia Motors Finance Company can look at my credit information. Why?
The law restricts who may access your credit information. The dealer has obtained your consent so that KMFC can review your credit information. Based upon KMFC's response to your credit application, the dealer may sell your contract to KMFC.
My retail installment contract has a logo for Kia Motors Finance Company at the top. Does this mean that Kia Motors Finance Company is the creditor?
No. The dealer may or may not assign your contract to KMFC. Often, creditors supply forms to dealers, some of which contain their logos, as a way to remind dealers to consider them as possible purchasers of the contracts.
Doesn't the finance company set my APR?
No. The APR, like other contract terms, is determined between you and the dealer.
Does the finance company or bank pay the dealer for the contract?
Yes. The dealer usually receives a fee for the contract. This may be based upon a percentage of the APR or it may be a flat fee.
The dealer is making money on my purchase. Why does the dealership make money on my financing?
The fee compensates the dealer for work that is not involved in a cash sale or where a customer has arranged for financing directly from a lender.
My dealer sent my credit application to a financing source before we even wrote a contract. Why?
The dealer may begin to look for potential purchasers for your contract even before the contract is complete. That permits the dealer to make sure the terms of the contract will make it saleable.
My brother and I got different rates financing the same model car from the same dealership in the past couple months. Why?
There can be many reasons for the difference. Probably there are differences in your creditworthiness such as existing debt, for example, even if your incomes are similar. Interest rates may have changed, or special financing programs were available. Other terms of your financing, such as the number of payments, may have differed, too.
How do I know the APR, Amount Financed, etc.?
These terms are set apart on your contract in the "Truth in Lending" box. The dealer will give this information to you to review before you sign your contract. You should take the time to be sure you understand these terms.
Does the Truth in Lending box show the price paid to assign the contract?
No. This box shows the cost of credit to you. You are entitled to disclosures of the credit terms you agreed upon. The Truth in Lending box does not show the business arrangements between the dealer and any potential purchaser. Some contracts contain a reminder that the APR may be negotiable with the dealer and that the dealer may be retaining a portion of the finance charge. Kia Motors Finance Company voluntarily includes this reminder on contract forms it provides to Kia dealerships.
Can I finance directly with Kia Motors Finance Company?
No. Kia Motors Finance Company provides financing only through vehicle dealerships like your Kia dealer. Kia Motors Finance Company is an "indirect lender" it does not make financing available directly to consumers.
What You Need To Know About Leasing Your Vehicle
Leasing generally offers the advantage of little or no down payment and low monthly payments. Leasing can allow you to drive a better-equipped vehicle than you might have been able to purchase using cash or credit. Leasing usually results in lower monthly payments than purchasing over the same term. Generally, leasing is a win-win for most drivers. The exceptions are those that want to keep their cars for a while or those that put a lot of miles on their vehicle each year.
A lease is actually a payment for the use of a vehicle over a specified period of time, rather than a purchase. Your payments cover the vehicle's depreciation over the term of the lease. Because this amount is usually much less than the full purchase price, the payments can be less. You (referred to as the "Lessee") agree to maintain the car during the lease and only put the number of miles specified in the lease agreement. At the end of the lease, you return the vehicle or may take advantage of the option to purchase it.
Is Leasing Right For Me?
Are you a driver that takes care of your car and puts between 12,000 and 15,000 miles on your car a year? If so, you might find that leasing makes good sense for you by offering lower payments and an opportunity to drive a new car every two to three years. On the other hand, if you put a high number of miles on your car (in excess of 20,000 miles per year) or tend to drive your car for 5 years or more before trading it in, leasing may not be the right option for your needs. Your Kia dealer is knowledgeable about both plans, and can provide you with specific details about the car you are interested in.
Balloon Note: This is very similar to a lease. The difference is the vehicle is registered and insured in the customer's name. This allows customers, in states where leasing is not popular, to enjoy the same low monthly payments as with a lease.
Net Capitalized Cost: The amount used to determine the lease payments. This includes destination charge, acquisition fee, and security deposit (refunded at the end of the lease) minus any discounts from the vehicle's residual value at the end of the lease, and any capitalized cost reduction (down payment).
Capitalized Cost Reduction Payment: A payment made to reduce the net capitalized cost and therefore the monthly payment amount.
Conventional Financing: A financial note or installment credit that pays for the principal (the value of the car) and the interest. At the end of the note period or installment term, the full amount has been paid. Longer terms (66 and 72 months) are used to lower the payment, but typically customers trade their vehicles before the note comes due or the contract is paid in full. The payoff amount for longer-term financing will most likely exceed the value of the vehicle.
Depreciation/Residual Value: The amount the vehicle's value will decline over the length of the term. For example, a vehicle may be worth 45% of its original MSRP (Manufacturer Suggested Retail Price) at the end of 36 months. Therefore, its deprecation would be 55% and its residual value would be the 45%.
Money Factor: Equivalent to the interest rate on a loan. It is the interest rate divided by 24 (regardless of term).
Term: The length of the lease. Typically, most leases are written for 24, 36 and 48 month terms.
Advantages of Leasing
Lower Payments: With a lease, your monthly payments will almost always be lower than with conventional financing because you are paying for only a portion of the car's full value over the lease period. This gives you the option of driving a nicer car for the same monthly cost.
Manufacturer Incentives: In tough times or in a new model year, manufacturers may offer very attractive terms such as below market interest rates and high residuals that have the effect of lowering the monthly payment.
Lower Up-front Costs: Unless you decide to make a large cap reduction payment, initial costs for most leases will be limited to a refundable security deposit (typically one monthly payment rounded up to the nearest $25), sales tax depending on your state, title and registration fees, environmental fees (i.e., battery and tire disposal fees), and finally, your first monthly payment. As a result, leasing ties up less of your capital, freeing cash for more lucrative investments.
Taxes: With the phasing out of deductions for interest on car loans, leasing may now compare more favorably against conventional financing from a tax standpoint. Although most individuals will not save taxes with a lease, some businesses may enjoy certain advantages with leasing. Consult your tax advisor for more information.
Hassle-free Disposition: At the end of the lease you can simply give the car back to the dealer, satisfy your lease-end obligations, and walk away. No need to worry about selling the car or haggling over its trade-in value. If you decide to buy the car at the end of the lease, you'll have an idea how much the cost will be (no more than the residual value).
No major repairs: Kia new vehicles are covered by a factory warranty for the duration of your lease contract. However, regular maintenance is your financial responsibility. Some leases allow you to add this to your monthly payment so you will not have to pay for it later and in larger amounts. It is also helpful to have your maintenance done at a Kia dealership. They will keep a record of your visits, which is excellent proof of your maintenance for the recovery of your security deposit.
Disadvantages of Leasing
Early termination: Depending upon the contract, there might be penalties for terminating before the end of the lease. This is due to the term being the key factor in calculating the lease payments.
Mileage limitation: Leasing contracts have annual mileage limits. The mileage is one of the key factors used to determine the residual value. Therefore, the higher the mileage, the lower the residual value. Typically, there is a 2% point difference between 12,000 miles and 15,000 miles. If you plan to drive more than the mileage specified in the lease you can pay for the excess mileage up front, or at the lease termination. Typically, paying for up-front mileage is less expensive.
Higher insurance coverage requirements: Leases generally require higher insurance coverage limits for liability insurance and you must purchase comprehensive coverage.
Calculating The Monthly Lease Payment
Lease payments are based on the capitalized cost, which is the MSRP, including destination charge, acquisition fee, and security deposit (refunded at the end of the lease) minus any discounts from the vehicle's residual value at the end of the lease, and any capitalized cost reduction (down payment). The monthly payment is determined by dividing the depreciation (net capitalized cost, less the residual) by the term of the lease, and adding the cost of the money (the money factor times the sum of the net capitalized cost and the residual). States vary on their charges for documentation fees, license plates and taxes and amounts must be added to the payment. Additionally, if you owe more on your trade than it is worth, this amount can be added to the net capitalized cost and paid down through the monthly lease payments.
The residual value is based on the vehicle's resale value at the end of the lease. This is influenced by its popularity as a used car. Residual values are set at the time of the lease (which make the lease a closed end lease as opposed to an open end lease where residual values are not set beforehand - open end leases are very rare today.
Do's and Dont's of Leasing
Your Homework - Learn as much as you can about leasing. Be sure to understand how a lease works and the meaning of the terms.
Read the Lease Contract - especially the fine print - BEFORE you sign it. Be sure to understand your obligations and liabilities for early termination.
Make Sure All the Figures Add Up - Calculate the monthly payment yourself. If it doesn't match with the payment on the contract, ask questions until you understand why.
Know the MSRP for the vehicle you are leasing.
Be Prepared to Go the Distance on the lease - Early termination of any lease is almost always costly. Make sure that your personal situation will allow you to fulfill all of the obligations of the contract.
Maintain and Insure Your Leased Vehicle - The insurance is required, and taking care of the vehicle will save you dollars at termination.
Lease Without GAP Insurance - For just a few dollars a month, you protect yourself from a big loss in the event of forced termination such as a thief or accident where the vehicle is totaled. All leases through Kia Motors Finance Company come with GAP insurance automatically.
Lease Without Full Disclosure of the money factor, residual value, and the capitalized cost.
Accept an Open-End Lease - Remember, in an open-end lease the payment is based on an estimated residual value. If the actual value is less at the end of the lease, you must pay the difference.