Auto Financing

About 4 out of 5 new car purchases are financed, as few people can afford to pay $20,000 to $40,000 cash for one. Given this fact, it’s safe to assume that you will probably need to get a loan to pay for that nice new Saturn or Lexus. Hopefully, you already have a budget and know how much you can afford every month. If not, that should be your first consideration unless you don’t have a problem with eating peanut butter sandwiches and macaroni for the next 3 - 5 years. For the majority of people, around 20% of their gross income will go towards a car loan, give or take a few percent. That’s a good bit of disposable income, so make the right choice the first time.

Having said that, your budget may not allow you to have the ride of your dreams. Choose carefully so as not to end up in the poor house while driving a slick new Porsche or Jaguar. Settling for a Ford or a Honda will not make you a bad person. Take other factors into consideration as well. The cost of insurance will be higher for a sports car or SUV than for a simple family sedan. These days gas mileage is also a major factor in the cost of owning a new automobile.

One thing you will need to think about is where you get your loan. Your own bank might be able, even willing to give you a loan for a new car, and it might be a better deal that what the dealer can come up with for you. Even so, sometimes the plan that the dealer offers can be a very good one indeed. Check around with local banks, credit unions and finance companies to see what kind of loans are available before you decide to settle with the dealer’s plan. Pay close attention to current interest rates. The lower, the better no matter which type of loan you choose. Don’t fall for the low down payment scheme either unless that is the only way you can do this. Sure, a low down payment helps you out right now, but you will pay for it later on with the interest on the remaining loan. On the contrary, give up the most you can possibly afford as it is immediate payment against the principal and will lower your monthly payments. Car manufacturers like to offer a factory to dealer incentive sometimes. These can help the buyer as much as they help the dealer. They are designed so that the dealer is refunded a percentage of the price of the car so that, even if the dealer sells at invoice he will still make money. Watch for rebates as well. Manufacturers will offer these to help the dealer move his inventory, which could mean a substantial savings for the buyer as a cash rebate, a lower interest rate or a combination of the two.

Another important step is to shop around some before impulsively buying a car that you may have trouble paying for. In most places there are at least a few, often several dealerships in the area and their plans and prices can vary considerably. Taking the time to visit a few different dealers can improve your chances of getting a good deal in the long run.

Remember, you are the one buying the car, so you are ultimately in charge of the whole process. Don’t make the mistake of letting a dealer pressure you to commit to his finance plan if you know that you can find a better alternative.