Car
Finance Loans
While
the first two points we discussed on
car finance
loans
are fairly
elementary, the third point many times is what gets people into
difficulty when they opt to finance their car this way.
Automobile
sales people are trained to find a monthly payment that
they can get you to agree to.
Sounds innocent enough, but if work
your way into your dream car negotiating monthly payments, you'll
lose.... and could lose big.
One of the ways is the amount of
financing costs you'll pay over the life of the automobile loan.
Not to mention how much longer you'll remain 'upside down' or
'flipped' in your car (more later).
So, even though those monthly
payments may look attractive.... be very afraid... you should NOT be
buying your next car based on where the dealership can get your
monthly payments to land!
Buying time costs you money!
Buy your car
based on how much you are willing pay for the car and how much you
are willing to pay for the financing..... NOT based on a monthly
payment. If you stay focused on the price and the financing and you
have done your homework on your credit and interest rates, you will
know what your monthly payments will be and you will know if you can
afford the car.
Sometimes examples with numbers work better so
perhaps it is easier for you to digest the numbers with an example.
Let's
use our $15,000
car financing loan at 8%. Now I know that 8% seems high with the
going interest rate now, but I use the 8% as an average over the
past several years and if you are financing a used car, you won't
get those super low new car rates that are out there at the time of
this writing.
O.K. $15,000 at 8% over a 5 year loan will lower your monthly
payments by $62 when comparing these same numbers to only 4 year
automobile loan.
But, in financing circles, borrowing time is not
without cost. The 5 year car loan in this example is actually going
to cost you $672 more over the life of the loan than the 4 year
loan!
Definitely something to consider when looking the financing
costs. Time will cost you money.
With the price of new cars (and used cars) constantly rising,
lending institutions along with automobile manufacturers have been
forced to get more creative with their car financing options in
order for you to be able to afford those monthly payments (but
remember you don't car shop based on monthly payments).
The most
common way for dealerships to accomplish this is to offer extended
time on their car loans. Today 72 months is not uncommon. WOW! Six
years to pay off your car loan! And it will probably get even
longer. Not for you..... right?
Now, let's throw our old friend depreciation and the drop the car's
depreciation value into the mix here and take a look at how these
longer financing periods with these very attractive 'monthly
payments' are going to affect your financial position in the car.
Earlier, I tossed out a couple of terms; 'upside down' and 'flipped'
in your car. I'm sure most of you have heard of these terms, but you
need to take a hard look at this when you are financing your car.
Simply put, the longer the term of your car loan, it is going to
take you longer, much longer to get yourself in a positive equity
position in the car. Meaning
the trade value of your car is actually greater than what you owe on
your loan.
Remember, the goal is to get all the pieces to fit for
you and the longer you stretch your 'monthly payments' out the
longer it will take you to catch up with the depreciation cost on
your car...... hence the longer you will remain 'upside down' in
your car, the more the financing will cost you, and when you get the
urge to trade for your next car the tougher it will be to do so....
and if you manage to roll your negative equity into your next car
(and by the way, the dealer will be more than eager to give that a
shot) you'll be even further behind the car financing eight ball!
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Lowest Car Loan
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