A highly disciplined group of people are able to pay for their vehicles in pure cash. Everyone else must borrow money in order to repay their bill. The dealership receives money from the car financing institution and you will repay them monthly, exactly as you would with a short term mortgage. You’ll be billed interest by the lender and sales taxes by the state.

Budgeting Financing

Your combined costs for car financing payments, gas, and insurance should never exceed more than 15% of your total monthly income. In financing, the focus is your monthly payment amount with interest and taxes. This number must be less than 10% of your monthly income. Seek a car you can easily afford under that number. If the car you’re looking at buying is too expensive on a monthly or total basis, adjust your selection. You’ll stretch your financial safety purchasing a car you can’t afford. You’d waste your net worth even if you paid for a car outside the 10% monthly income range in cash since cars typically depreciate.

To receive an accurate indication of costs, combine financing and all other costs together. Title fees, taxation, licensing, registration fees, and documentation is non-negotiable expenses that should be a part of your decision.

Loan Terms

The terms of your car financing loans should be carefully considered. Interest adds up over long periods of time, and will substantially increase the total cost of your loans. The longer the term the worst your costs are. You must pay off your loan within your loan term, so the length is directly correlated to the amount of your monthly payment. Loan terms typically are 2 to 6 years. A shorter loan term has higher monthly costs but lower total costs. A long loan term has low monthly costs but higher overall costs. Get the shortest term with a monthly payment in the 10% to 15% budget range. This will give interest less time to compound, lowering your total cost.

Another risk to long term car financing is paying more than the car’s value after depreciation. A high-interest rate can result in you paying far beyond the car’s value in loan repayment.

These are both reasons dealership car financing departments love customers who acquire loans from the dealer instead of paying cash or acquiring loans from a bank. They love to increase their profit by giving you a long term with a high rate. Dealerships get a cut of the interest from your loans. This is known as the “dealer markup/reserve”.

A wise negotiation tactic is acquiring a loan elsewhere and negotiating as if you do not have financing. They will make concessions believing they can make up for some negotiation losses with the dealer’s markup on the loan. You will negotiate a lower price, pay your down payment, give them your trade-in, and use the external financing to save even more money.

Credit and Loans

Pull your credit report before navigating for loans. You’ll need to know your score to determine the average rate you can acquire for your credit rating. There are multiple internet websites that allow you to plug in your credit score and 2-year to 4-year loan term and receive an interest rate estimate. If your monthly payment is above 15% of your monthly income, improve your credit score. If your monthly rate is below 10 to 12% of your monthly income, begin looking for pre-approval from banks. Use online loan appraisals to compare rates from many locations for the term and interest rate. Contact local banks or credit unions to get an offline comparison for the loan’s value. Seek pre-approval afterward.

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