Learning Center
Budgeting Tips
It's sometimes tempting to overspend to get your dream car. It's important to avoid getting yourself in over your head. Because buying a car is a major purchase, it's smart to start with a carefully thought-out budget to help you determine how much you can afford for your new car or truck.
First Things First
Check your Equifax Credit Report™ Most lenders will use the information in your credit report to decide if you qualify for a car loan. Some may use your debt-to-income ratio, which is the amount you owe compared to amount you earn. Be sure to check your Equifax Credit Report™ to make sure there's no negative information that could hurt your chances or getting the loan you need.
How Much Should You Pay?
Many experts agree that your loan payments should be no more than 20% of the money you have left each month after paying all your regular expenses -- rent or mortgage, utilities, credit card balances, living expenses. And remember that there are additional costs to car ownership, like insurance, gas, and upkeep.
Pay out of Pocket?
Paying out-of-pocket is almost always less expensive than financing the purchase. Unless you can invest your money at a rate that is higher than the car loan rate, you would be better off paying in cash. Be careful! Leaving yourself unprotected in the event that you need emergency funds would be far more financially damaging than taking out a loan for the car.
Negotiating Price
When you're ready to sit down and negotiate price, it's important to have an idea of your walk-away price. Your walk-away price should be based on your research of the car and what the fair market value is.
Down Payments
It makes sense to pay as large a down payment as you can afford. Doing so reduces the amount of money you must borrow to pay for your new vehicle, and therefore lowers its total cost. You'll reap the rewards in lower monthly payments.
Most experts recommend at least a 20% down payment. This amount will most likely keep you from ever owing more than the car is worth. In fact, many lenders require this amount to approve an auto loan.
Interest Rates and APR
All lenders are required by law to quote interest as an annual percentage rate (APR) of the monthly loan balance. What does that really mean? Well, your APR includes all charges associated with the loan -- such as credit report fees, application fees, and origination fees. A number of forces affect the APR you'll pay on your loan. With Score Power®, you can check your FICO® credit score, the score used by most lenders to determine your credit worthiness.
Where do you live? Interest rates for loans vary by region.
Who is lending the money? Different types of lenders charge different amounts, based on the competition in their field.
How long is the loan for? Short-term loans are generally cheaper than long-term loans.
What other market forces are at work? Other market forces always have an effect on current interest rates.
Loan Terms
For new cars, loan terms of 60 months and more have become common. This is due partly to increasing prices that have made traditional 24-, 36-, and 48-month loans less affordable for many buyers, and to the increasing reliability and life expectancy of new vehicles.
Even so, you should still be wary of loans with terms longer than 48 months. If not, you could find yourself owing more on your car than it's worth.