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Many financial advisers suggest that your total monthly
vehicle payments — whether you own one vehicle or
more than one — should not exceed 10 percent to
20 percent of your monthly net income. This amount
should include loan or lease payments, fuel costs,
maintenance, repairs, insurance premiums, other annual
payments and fees associated with your vehicles.
Paying Cash
Paying cash is often the simplest and least expensive
way to buy a vehicle if you:
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Have ample cash available.
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Want to avoid paying interest and finance
charges on loans and leases.
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Are not worried about missed investment opportunities.
Financing
Financing may be a good idea if you intend to
keep your vehicle for a long time or you do not
have the cash to purchase the vehicle. At the
end of the financing period, the vehicle will
belong to you. There are drawbacks to financing.
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You will pay more for your vehicle in interest and
finance charges than you would if you paid cash.
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Your vehicle may depreciate faster than your
loan is amortized. You may owe more on your vehicle
loan than you can get from it if you sell it before
the loan is paid in full.
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Because your vehicle loan is one of your debts,
it may also lower your debt-to-income ratio and
disqualify you from financing another asset such as a home.
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Financing may encourage you to buy a more expensive
vehicle than you should consider for your income
and obligations.
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You can lose your vehicle if you cannot make the payments.
Most lenders keep the legal title to financed vehicles
in their name until the loan is paid in full. If you
default (do not make payments as required in your
loan contract), your lender may be able to repossess
the vehicle.
There are three options available for financing your vehicle.
1. Direct Lender
Talk with your lender. As a current customer, you
may be able to get a better interest rate than
you would from another lender or a dealership.
Interest rates are not the only point of comparison
when you are shopping for financing.
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Compare the amount that the lender is
willing to finance, the down payment
required, the loan period, grace periods,
other fees and charges, terms and
conditions and requirements such as
insurance coverages.
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Consider the ease of doing business with a
lender. Does it offer online services such
as bill payment? Can you access a service
representative when you want to discuss
your loan?
Remember that the best loans are those that charge
simple interest and have a low annual percentage
rate (APR) with no prepayment penalties.
Consider prequalifying for the best loan available
from financial institutions before you negotiate
with a dealership. Prequalification does not
mean that you are obligated to accept a loan,
unless you sign a contract. It simply enables
you to understand your true borrowing power
and gives you the security of knowing that
you already have funds ready to make the
best possible deal. Making too many applications
can drive down your credit score.
2. Home Equity Loan
You may be able to use the equity in your
home — the difference between the market
value of your home and the amount of your
mortgage debt — as collateral on a home
equity loan. By tapping into that equity you
can get the funds to buy a vehicle for cash.
Generally, you have a choice of taking a lump
sum through a second mortgage or by refinancing
your first mortgage and taking out cash. Or,
you can take a home equity line of credit,
borrowing only when you need cash and repaying it
like a credit card.
Because the interest on home equity loans is
generally deductible for federal income tax
purposes, you may also get a valuable tax
deduction for your interest payments on the
loan. Also, rates are typically lower than
some other types of loans because the loan
is secured by your home.
But there are risks as well. If you cannot
make your loan payments, the lender can
foreclose and you can lose your home. Before
you borrow, make sure you can make the
payments. Borrowing against your home
is a poor choice when the price of housing
is falling. If the equity you use as
collateral disappears, the lender may suspend
or terminate access to your home equity
line of credit. Look for no-fee home equity
loans offered by financial institutions and
credit companies.
3. Dealership Financing
Most vehicle manufacturers and many dealerships
offer their own financing. These loans can be
tempting because they may offer low interest
rates and an easy application process. If you
can find manufacturer or dealership financing
that is superior to any other financing
available to you, consider it strongly. However,
dealerships’ low financing rates are often
offset by other costs negotiated by the
dealerships. Be cautious and read the fine print
for all terms and conditions.
You may be required to:
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Relinquish a rebate or make a larger
down payment to get the financing.
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Pay a higher price for a vehicle.
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Buy additional services or merchandise
to qualify for the loan. The best rates
may be offered only on certain less-desirable
models or for a limited time period. There may be
limits on the length of the loan.
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Make a balloon payment.
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Pay extra points as part of the loan.
If you decide to accept a dealership
loan, read your contract and your sales
invoice to make sure you understand all
the terms and conditions.
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