Truth: The car-buying process isn’t exactly a party. While a sleek new set of wheels may be alluring — you still have to consider the costs — and weigh whether financing is the right decision for you. Just make sure you’re doing what’s best for your needs, lifestyle, and pocketbook. If you’re debating whether financing a car is a good idea, here are a few things to consider:
1. Collective Costs of the Car
You might be thinking, “duh.” But beyond the manufacturer’s suggested retail price (MSRP), you’ll want to factor in all the ancillary charges, as well as costs of regular maintenance, repairs, and insurance. If you’re getting a new car, your insurance could also rise. It’s helpful to think of the actual cost of the car — and interest you’ll be paying on financing it — as two separate things. Also, don’t forget to factor in how much you’ll be paying in taxes. By thinking of the sticker price of the car plus taxes and the interest on the loan separately, and negotiating them separately, you could potentially save on your total cost of the car. The reason? When everything is rolled into a single cost — the deal gives you just the monthly payment — so the amount you’re actually paying might be a bit murky.
2. Your Ability to Repay
Your ability to comfortably repay is one of the most important things to think about before taking out a car loan. If you aren’t able to keep up with payments and default on the loan, your credit score could take a serious hit and your car may even be repossessed. Since credit is crucial to being a consumer, you’ll want to maintain as high a score as possible. If you take out a loan with a longer repayment period — say, 72 months versus 60 months — your monthly payments may be lower, but you’ll be paying more on interest. And, ultimately, you’ll spend more paying the lender over the life of the car loan.
3. Your Current Financial Situation
Unless you can get a stellar rate and favorable terms on your car loan, ideally you would save up and pay for as much of the car out of pocket as you can. Financing a lower amount can help you get to a lower interest rate. But if you heavily rely on your car for work, and it’s on its last legs, you may consider taking out a larger loan so you can purchase a new set of wheels sooner than later. If you have strong credit and can net a low interest rate or a zero percent APR, you might consider putting less down and making minimum monthly payments. On the flip side, if you have poor credit and get approved for a loan with a high interest rate, you may want to save up, put as much down up front as you can and prioritize paying off your car loan ahead of time. Besides being able to make on-time payments on your loan, think about your other savings goals — in the short and long run. This can be anything from crushing your student loan debt, squirreling away funds for a house, or going on that dream vacay to Bora Bora. While you may have enough saved up to pay for most of your car, you might want to put less down, so your funds can go toward other savings goals.
4. Your Credit Score
Your credit score will be a major factor in securing a loan with favorable terms and a low interest rate. According to Experian, the average credit score is 717 for those who got a new car, and 652 for those who got a used car. So if you have a lower credit score, consider buying used, as you may have a greater chance of getting approved for a smaller loan. As having a high credit score nets you a lower interest rate and better terms, you’ll want to make sure your credit is as solid as possible. Before you car shop, get a credit report and check for errors. Disputing any errors could help improve your score. You’ll also want to check your credit score to see where you stand. Having a car loan could also help boost your credit. Your credit mix, or different types of accounts, makes up 10 percent of your credit score. If you don’t have many different types of credit, adding a car loan — if it’s the right fit — may benefit your credit score.
5. Getting a Co-Signer
If your credit is less than stellar, a co-signer could help you get a better interest rate. Note that if you have trouble keeping up with payments, your co-signer will be responsible for paying off the car. A word of caution: be sure to thoroughly discuss expectations with a potential co-signer for what you’re each responsible; you’ll want to ensure that you’re on the same page before agreeing to both shoulder a loan. Keeping all these things in consideration will help you figure out whether financing a car is the right choice for you and prevent you from biting more than you can chew.