* According to JD Power & Associates
Unless you are independently wealthy or have thousands of dollars in savings, you will almost certainly have to get a loan. If you have the cash to pay in full, you are in the best financial position. People think that obtaining affordable auto financing is a painful, humbling or potentially embarrassing process—and they're right. However, being informed ensures that you not only make a smart decision, but puts you in the best position to buy.
How Much Can You Spend
Before you do anything, evaluate your budget and determine how much you can spend. Financial experts believe that you should not spend more than 20% of your monthly income (before taxes) on car payments. Take your rent/mortgage and other expenses into account and determine how much you can pay for a new car. Once you determine how much you can afford, you will set off a domino effect in the new car purchasing maze.
Do Your Homework
You are not only in the market to buy a new car, but to save money too. Spending less on a new car starts with your car loan. 73% of all new car purchases are financed, so unless you are in the remaining 27% you will have to either take out a loan or finance through leasing.
Cash Rules Everything Around You
If you have enough money to buy a new car outright—do it! If the space under your mattress is filled with cash and you can afford to buy a new car without taking out a loan or agreeing to a lease, you will end up saving the most money. If the bed is bare, then you will have to finance. The more money you use as a down payment, the more money you will save on interest—it's that simple. A four year loan at an interest rate of 7% on $16,000 instead of $20,000 will shave $600 off the total cost. Not only will you save $600 in interest, but you will lower your monthly payments from $478 to $383. Experts advise paying at least 20% of the price of the car as a down payment to help minimize your monthly payments. You can also use the equity of your trade-in to get as close to 20% as possible. Click here to calculate your down payment, interest rate and other factors to get an accurate auto loan estimate.
Before You Look for a Loan
Find your FICO, also known as your credit score. Even if you have excellent credit, it is to your benefit to find out exactly what your credit score is. It will determine how much interest you will pay during the period of your loan/lease. Most people don't know their score and usually are afraid to find out. However, if you have bad credit, it is much better to know it before you're trying to negotiate a low payment at the dealer. You never know though—you might be pleasantly surprised by your credit score. Check your credit report & score here.
An example of how your credit affects how much you end up paying: If a car costs $26,000:
In loan speak, the number of months to pay off the loan is called the term. The shorter the term, the more you'll save. REMEMBER: Each payment you make means more interest you're paying.
Bad Credit Beware
The dealer might have the best advertised rate, but remember, they are only the middleman. You may be able to get a better rate by shopping around. If you finance through the dealer, make sure you know what annual percentage rate (APR) is and what size loan you qualify for. If your credit is spotty, find other loan options.
Three Places to Finance
There are three places to obtain financing.
Reverse Payment Calculator
Instead of finding the invoice price of a car before you set your calculations, our reverse payment calculator does all of the work for you by letting you input your desired monthly payments, desired term and down payment amount. This way you can get a list of cars that you can afford by using your monthly payments. I know it’s tough, but resist the urge to spend more than you can afford. There are plenty of new cars out there that can fit your needs and are well-within your budget, so don’t get greedy!
TIP: NEVER roll an upside down loan on a trade-in into a new car purchase. Why? Because you will immediately be upside down in your new loan, which, as I mentioned before, is a very risky place to be. If you exercise patience, the rate of depreciation will level out and your amortization will catch up and surpass the value of the car, leaving you with equity.
BOTTOM LINE: Cash is the bottom line. The best way to save money on a new car is to have as much cash as possible at the point of purchase. The more cash you can pony up front will trim down your monthly payments as well as the interest you will pay over the duration of your loan/lease. Saving is the name of the game. If you save your cash for a big down payment, you will be saving money in interest, while having lower monthly payments.