by Lori Straus
Financing a new car can get you behind the wheel years before you’ve saved up enough to pay for one outright. For some, that’s a luxury: they’d rather drive now and pay later. For others, it’s reality: to earn money, they have to drive now and pay later. Whatever your situation, though, there are several things you should consider when financing a new car.
What’s My Total Budget?
Take a good, hard look at your financial situation. Remember that a car requires more than monthly payments. You have regular maintenance, (hopefully) occasional repairs, fluctuating gas prices, and insurance. (If you know what kind of car you’ll buy, ask your insurance broker for a quote to take more guessing out of your budget.)
Take these costs into consideration when setting your budget, and don’t budge from your budget once you’re at the dealership.
Do You Want to Lease a Car?
A lease is basically a long-term rental agreement. When the lease agreement is over, you can either pay to buy out the car or you return it to the dealership. Car buyers lease a vehicle when they want a new car with lower monthly payments. However, the car is not yours, but you pay for all repair costs. The dealership will also place restrictions on how you use your vehicle.
Although car loans have higher monthly payments, once you’ve paid yours off, that car is yours. To calculate the differences between leasing and owning a vehicle, use this handy calculator from the Office of Consumer Affairs.
What’s My Credit History?
This is critical. If you have a poor credit history, then don’t buy a new car to begin with. The reason is simple: your interest rate will be too high and the car too expensive, no matter what make and model you choose.
So, before you consider financing your next vehicle, look up your credit score so you can anticipate how much interest you may have to pay on your loan.
How Long Should My Loan Be?
Unlike a house, a car depreciates the longer you own it. Car loans typically run for up to five years (60 months). However, shorter loans come with numerous benefits.
First, you’ll pay less overall interest. This can easily add up to over $1,000 that stays in your pocket. Second, once you’ve finished paying off your loan, the car is yours. If you set aside what you would pay for your loan for as long as you own your car, not only will you have a fund for important repairs, but you’ll have a sizeable down payment for the next car.
Last comes a little detail many may not realize: If your vehicle is ever in an accident serious enough to warrant writing it off, the insurance company will only pay you for what your car is worth at that time, not what you still owe on the loan. (And you will still be on the hook for that loan.)
This last point becomes especially important with 72-month car loans. Although loans of that length can possibly let you afford your dream car, if that car gets totalled in an accident in the first year or two of that loan, you’ll still have a lot to pay off.
Go for the shortest car loan you can afford, and it’s almost guaranteed that you’ll have less to worry about.
Can I Continue Paying My Loan If Something Happens?
This last consideration relates to almost every point above. Life happens, but you don’t want your car repossessed because you default on your loan. If the budget you’ve set for yourself is so tight that one unexpected event could reduce your chances of keeping up with your payments, consider a car with a lower price tag.
A car is still a requirement for many: it lets them drive to work, take the kids to school, and attend appointments at opposite ends of the city. For many, that reality means financing a car. If you’re financing a new car, take the above points into consideration to make sure that you’re not saddled with an unaffordable financial plan.