Arizona Tribune - What to Consider Before Financing a New Car

Like any balancing act, auto financing takes attention, preparation, and budgeting to keep from tipping too far in one direction. Here are four key factors car buyers should keep in mind as they weigh their options.

Budget: Establishing what's affordable

Many experts recommend spending no more than 10% of monthly net income - the money brought home after payroll deductions - on a car payment. Using this percentage, buyers can work backwards from their income to estimate how much they can afford to borrow.

The 10% rule helps ensure a car loan doesn't crowd out other financial priorities, like housing, savings, or debt repayment. But for some people, it can make buying a car seem unaffordable.

There are a few solutions to that situation, such as:

• Making a larger down payment. Typically, every$1,000 more paid upfront may reduce monthly payments by as much as $18.

• Trading in a vehicle. Applying thetrade-in value of a current vehicle directly to the purchase price of a new car reduces the amount of financing required.

A word of caution about trade-ins: Trading in a car with negative equity (i.e., when the balance owed exceeds the car's value) may increase the loan amount, tipping the scales in the wrong direction.

Terms: Weighing short-term comfort against total interest paid

When given a choice, car buyers sometimes opt for a longer loan to get lower monthly payments. However, that usually means they're choosing short-term affordability over long-term savings.

A high monthly car payment may strain a household budget, but lower payments often come with higher interest costs. Opting for a shorter term reduces the overall amount of interest paid.

Even better? Shorter-term loans tend to have lower interest rates, reducing the total cost of the loan even further.

Lender: Choosing the right loan provider

Financing a new car through the dealership may be fast and convenient, but it can be the more expensive option. Dealers sometimes mark up the interest rate when they arrange the loan to make a profit. Moreover, dealers typically work with a small number of lenders, which may limit loan options.

On the other hand, banks and credit unions may offer more competitive rates. Some banks may also provide rate discounts for existing account holders.

Either way, getting preapproved by a bank or credit union is smart. Not only does it help set a budget, but dealers may try to match or beat the rate.

Additional fees: Accounting for unexpected costs

Some additional costs, like sales tax, title and registration fees, can be rolled into a car loan. These aren't included in the sticker price and may catch buyers off guard if they're not prepared.

Other unexpected costs are optional extras. They may be nice to have, but adding them could throw a car-buying budget off balance. These include fees for:

• An extended warranty that continues coverage after the manufacturer's warranty expires.

• A service plan that covers routine maintenance.

• Gap insurance, which pays the difference between the loan balance and the amount the insurer pays if the car is totaled or stolen.

Additionally, dealers may charge fees to cover their administrative and operational costs. Many of these are negotiable, or avoidable altogether, including:

• Documentation fee.

• Advertising fee.

• Vehicle identification number etching fee.

• Fabric and paint protection fee.

• Rustproofing fee.

One dealer fee that's usually unavoidable is the destination charge. Set by the manufacturer, it applies to every new car regardless of dealership location.

Finding the right balance
The right car loan supports the buyer's financial goals without tipping the scales too far in any direction, but what that looks like depends on the individual's circumstances. Taking the time to compare options and ask questions can help car buyers secure financing that finds the right balance.

Sources
https://www.nerdwallet.com/article/loans/auto-loans/much-car-payment
https://www.nerdwallet.com/article/loans/auto-loans/how-much-down-payment-make-buying-car
https://www.experian.com/blogs/ask-experian/is-it-better-to-finance-a-car-through-a-bank-or-dealership/
https://www.bankrate.com/loans/auto-loans/how-to-decide-between-bank-or-dealership/
https://www.experian.com/blogs/ask-experian/hidden-costs-of-auto-loans/
https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-manufacturers-warranty-and-an-extended-vehicle-warranty-or-service-contract-en-825/
http://consumerfinance.gov/ask-cfpb/what-is-guaranteed-asset-protection-gap-insurance-en-797/
https://help.edmunds.com/hc/en-us/articles/206102367-Are-destination-charges-negotiable

CONTACT:
Sonakshi Murze
Manager
[email protected]

SOURCE: iQuanti

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S.Jackson--AT