Shaking hands after an auto loan
Auto Loans

Before You Take Out An Auto Loan

There is nothing like getting a new car. The smell of all of that fresh plastic and leather can be quite intoxicating. So much, in fact, that it can lead you to make some very bad decisions. If you are getting ready to take on a new auto loan, here are some things you need to consider.

Getting a new car is certainly an exciting  experience, but it can also be a costly venture. The excitement of a new car can often causes you to make some very poor decisions that will linger for years. Once that new car smell wears off, that loan contract is very much still in affect.

Before you rush off to the dealer and get intoxicated by that new ride, take some time to research all of your options. Here are some things that you should consider thoroughly before you proceed.

What Can You Afford?

First and foremost, you need to know how much you can afford. Take a look at your budget and decide how much of a payment you can afford. You can then take that money and use a payment calculator to determine your buying power.

Let’s say you have 400 dollars to spend per month and have decent credit. On a 5 year note(don’t let anyone talk you into any longer) you can finance about $21,000. Minus sales tax, that is about $19,700 plus whatever money you want to put down.

Knowing what you can afford ahead of time can help you choose the right category of vehicle and prevent you from making a budget mistake. If you can only afford $20,000 and shop $30,000 vehicles, it is hard to move to a cheaper car and you will likely end up with a payment you can not afford.

What Are Your Financing Options?

Another consideration is what type of financing you want to do. In general, this means do you want to purchase or do you want to lease?

Purchasing

If you plan on keeping your car and driving it a lot, purchasing is probably the way to go. In general, if you plan to keep your vehicle longer than 3 years or drive it more than 15,000 miles, you should purchase.

Leasing

If you like a new car every couple years and do not drive very much, a lease might be something to consider. Be cautious because leases generally have steep penalties when you drive too much. Anything over 12,000 miles a year and you would likely be better off purchasing.

Why Are You In A Hurry?

There is almost never a need to rush into an auto purchase. If you are in a hurry, you just play into the hands of the auto dealer and will likely end up with a loan that you can not afford. Never let a dealer pressure you with the idea of losing a particular car, they can always get another one.

Taking your time in your auto purchase can help you do several things.

First, it can help you decide exactly what type of vehicle you want. Test drive many different cars and trucks and do the research. Read reviews from online magazines and check out online forums. Almost every vehicle out there has a forum dedicated to it.

Also, keep an eye on what dealers are selling vehicles for. This can give you an idea of the real going rate and what a fair price is to pay.

Finally, if buying new, keep an eye out for next years model. The next year model might have features that you want more and it may be worth waiting for. If not, waiting for the new model release could still be worth it because of rebates on the prior year.

In short, it pays to be patient.

What Are The Hidden Costs?

Your vehicle expenses only start with your auto loan. There are a lot of other costs of ownership and they may vary quite a bit from model to model.

One thing to consider is fuel mileage. A car that gets only slightly better mileage might save you hundreds of dollars over the course of a single year. Let’s say you drive 15,000 miles a year and are considering a car that gets 20 miles a gallon and one that gets 22 miles per gallon. The second car will save you 69 gallons a year, which is nearly 200 dollars in your pocket.

Another big item in your vehicle expense is your insurance premium. Some vehicles are just higher risk than others. The difference between your average sedan and a 4×4 pickup truck, for example, can be huge. Likewise, your need to get a sports car will cause your premium to inflate significantly as well.

Finally, consider how much your vehicle will depreciate. You want a vehicle that holds its value for several reasons. It will give you more money in your pocket at trade in time and it will likely cost you less to finance. Vehicles that depreciate fast are more of a risk to finance companies and it will bump your rate. Even a measly 1 percent hike on a $20,000 loan can cost you over 500 dollars in interest over 5 years.

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