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Car Financing – What to Know

A couple of weeks ago I helped a friend decide on financing for his new, blue truck.  I love doing this kind of cost comparison.  It’s fun to see what effect a little change in a variable can have.  Listen to me, I sound like a huge nerd. 

Well, there are many things to consider when buying a new car.  Sedan, minivan, truck.  Rims, moonroof, sport package.  Color, leather, MPG.  Don’t act like you don’t like making all of these decisions; customization is the fun part.  When it comes time to shake hands, sit down and talk money, however, many people find themselves slightly unprepared and a little overwhelmed.  This person in the finance department deals with numbers for a living.  And while they can crank out a cost comparison spreadsheet lickity split, you may find yourself wondering just what the heck they are doing.  You can either trust this total stranger, or you can go in with a little more knowledge.  Don’t you count your change at McDonald’s?



Adjust your car buying expectations and perceptions:


1. Opportunity Costs


When you make the choice to finance, you are committing your future wages to something you will be enjoying now.  While debt can be fine in moderation, it’s important that you budget for the additional expense.  Remember, you may have to cut back on some of your discretionary/fun spending for the length of the loan; can you do that for 36, 48, or 60 months? 


2. A financed $30,000 car will cost you more than $30,000.


I’m not talking about maintenance costs or taxes (though these should both be considerations when you buy).  I’m talking about how much you will actually pay for the car itself.  Interest will accumulate monthly and you will pay it off monthly. 


Consider a $30,000 car, financed over 6 years (72 months) at a 7% interest rate.  This loan will have a total of $6,825.85 in interest.  You would be paying $36,825.85 for this car; I bet that’s more than you budgeted.   


3. It’s worth it to shop around for a better interest rate. 


The more the car costs, the more important this one becomes.  Often times the dealer does not have the best rate available, so shop around. 


The same loan as in #2 with just a 1% lower rate would have just $5,797.44 in interest  ($1,028.41 less). 


4. Take some different scenarios with you. 


There are several loan calculators online that will do the work for you.  I suggest the one at Bankrate.  You can see how much interest you’ll pay at different rates and what you payments would look like over different periods of time.  If you’re a nerd like me, you might enjoy looking at the amortization tables to see just how much interest is included with each and every payment.  Sounds like a fun Friday night to me!

 


Article publié pour la première fois le 28/07/2010

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