Buyer Tip: One mistake many buyers make is buying more vehicle than they can afford. Buyers let emotions determine how much they pay verse what they need and can afford.
Before a buyer goes to the dealership they should determine the amount they can afford for monthly payments, term of loan (length in months) and down payment.
Monthly Payments
Some experts say a buyer’s loan payment and related vehicle expense should not exceed 20% of monthly net income. Others say a buyer’s long term debt payments should not exceed 30-36% of monthly gross income. The best rule is … how much can you budget for monthly vehicle loan payments and still enjoy your same life style.
Length of the Loan
Never finance a vehicle loan for longer than you intend to keep the vehicle. You can usually rollover your current loan balance but you will dig yourself into a financial hole very quickly. In industry lingo you will be “upside down”, owing more on your vehicle than it is worth. You will then find it almost financially impossible to buy the third vehicle without either paying off your vehicle or putting down a significant cash down payment.
Buyer Tip: Put the shortest loan on the vehicle you can afford. Longer loans will reduce the monthly payment but will significantly increase the total amount of interest paid during the life of the loan.
Buyer Tip: The buyer should balance the total cost of the loan against the monthly payment they can afford.
Example: A $15,000 loan, at 6% interest, will have the following monthly payments and total loan interest charges.
| Length of Loan (Months) | Monthly Payments $'s | Total Interest $'s | Loan Balance @ 48 Mths |
| 48 | $352 | $1,909 | $0 |
| 60 | $290 | $2,400 | $3,369 |
| 72 | $250 | $2,899 | $5,609 |
| 84 | $219 | $3,407 | $7,203 |
Down Payment
The down payment includes three items i.e. cash from savings, equity from your trade-in and manufacturers rebates. The equity of your trade-in is the fair market value less the amount you owe.
See Valuing Your Trade-In to determine the fair market value of your trade-in.
Calculating How Much You Can Afford
The following steps take approximately half an hour.
- Use the calculator on the Credit Union National Association Internet site at www.cuna.org to determine “How much vehicle you can afford.” Click on Personal Finance, Online, Credit Union Calculators, View Credit Union Calculators, Auto, How much car can I afford?
- Deduct approximately 8-10% from the amount calculated to cover state sales tax, licenses and fees. The calculated amount less 8 to10% is the amount of the vehicle you can afford.
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