Auto Loan Finance
Buying a new car is a major purchase, so we want to help you make a wise choice. With all the various financing options and offers available to you, it’s important to work with your credit union to find an option that is right for you. The following chapter provides information on obtaining a loan, finance costs, and common buyer mistakes.
Unit 1: Determine Your Car Needs
How Much Can You Afford?
In making a decision to purchase a car, you must first determine how much you can afford to finance. Spend no more than 20% of your net income on a monthly car payment. To determine what that number is, you'll need to figure your total net income after taxes and then subtract all your fixed expenses.
Once you know that number, you can answer three important questions:
- How much can you afford as a down payment?
- How much can you afford in monthly payments?
- How much should you spend on the total price?
Follow a few simple steps to get organized and determine your price range.
- Review Your Budget. Look at your expenses, as well as savings and take-home pay, and determine what you can reasonably afford.
- Determine Costs. If you're devoting more than 15 to 20 percent of your income to transportation, you should probably scale back.
- Make a Down Payment. By making a down-payment of 10 to 20 percent you will lower the interest rate of the loan and save money.
- Review Your Credit. Interest rates will be determined by your credit history, so take time to review your credit report before seeking a loan.
Know Your Finance Options
Before deciding on the vehicle you want to buy—new or used—review your finance options from the list below.
- Credit Unions. You can get an auto loan from a credit union and have the loans approved before you ever hit the showroom. Credit unions offer the lowest rates you'll find.
- Home Equity Loan. You'll get a good interest rate, and the payments will be tax-deductible. But be sure such a loan won't leave you in any danger of losing your house. After all, it's just a car.
- Co-Signer. If financing is a stretch, your family may co-sign for a loan. If they do, make sure they are aware of every detail of the loan and the consequences should things go wrong.
- Dealer / Manufacturer. As a general rule, dealer or manufacturer financing will cost you more because dealers mark-up costs by loading finance terms with costly extras such as insurance and warranties.
Here are some questions that you must ask when discussing financing.
- What's the interest rate? The annual percentage rate (APR) is the interest rate you pay annually on the unpaid balance of the loan. The rate you are offered will depend on your credit score.
- Are there any penalties in my loan? Does paying the loan off early entail penalties? Are there any other extra charges that could occur during the term of my loan? Are there "hidden charges'' that effectively are penalties?
- What is the total amount being financed? What is the dollar amount I'm paying for the finance charge? What is the total number of payments?