Chapter 2 - Financing Your New Car

Financing Factors

Even if you haven’t found a car yet, you should be thinking about financing. Most people who buy a new car will have to take out a loan and make monthly payments. It is a fixed payment that will not change for the life of the loan. The interest rate will also remain the same. Monthly payments can depend on many factors including:

 Price of car

 Amount of down payment

 Interest rate

 Length of loan

In addition to monthly payments, you should also factor car insurance into your budget.

Price of The Car

Even though you cannot control what the price of any car will be, you do have control over the amount you can spend on a new car. The price of your new car will include taxes, tags, and registration fees. They will be added to the sticker price before you sign the paperwork. You should ask for this price before agreeing to buy the car. Many times, the down payment will be enough to cover these costs. You should figure on putting at least $1,000 down on any new car.

You should consider only spending between 12 and 15% of your annual income (after taxes) on a new car. This will ensure that you will be able to pay the rest of your bills and financial obligations without stretching your budget out too thin.

You should consider your current salary and bills to decide how much money you can realistically spend on a new car.

Amount of The Down Payment

As stated above, a down payment can help you afford the monthly payments on your new car. You should be able to put down enough money to cover these costs and any other financing costs that will be added to the final price of the car. While many dealerships will advertise ‘0%’ down, it is in your best interest to put some money down on the car.

Interest Rate

The interest rate you receive will depend on your credit history which you can also control by maintaining good credit. The only exception is when you have little or no credit history, but even then, you should receive a fair interest rate. You should figure on a higher interest rate even if you have purchased a car before. Since interest rates can vary for many reasons, it is better to budget higher instead of lower. Typically, interest rates will fall between 6% and 9%.

Length of The Loan

The length of your loan will depend on how much you can afford to pay each month. The longer the car loan, the lower the monthly payments will be. This may affect your interest rate, however.

Typical car loans are given in 12 month, 24 month, 48 month, 66 month, and 72 month terms. You can choose which term you would like. You can always double up on payments in order to pay the loan off faster.