|
 Buying a new car is one of the most important investments you can make - which is why understanding what happens when you finance a car is so important. In fact, according to statistics released by the Federal Reserve in June of 2007, the average car loan hit a record high of $27,000 this year. And the average loan was for 92% of the car's total value.
In this article we're going to run through some of basics of car financing. That'll include a discussion of comparison shopping, buying a car on credit, some of the more important financing terms, as well as questions you should ask lenders. Finally, we're going to finish up with a couple of examples demonstrating exactly what a new car loan can cost you as well as providing you with links to online tools that can help you compare car loans.
Shopping for a New Car Loan
With slumping sales of new cars, automobile manufacturers continue to invent new ways to lure potential customers to their showroom floors. While low monthly payments, no money down bargains, and zero percent financing all sound like great deals - you still need to be able to figure out if you're getting a good deal.
That means before you run out to buy a car there are two very important things you need to do:
- Figure out how much you can afford to spend on a car.
- Understand your options when it comes to finding a car loan.
Affordable Cars
If you're not saving a lot of money each month then a new car loan will only add to your financial burden. Before you buy a car it's probably worth the extra effort to create a household budget. This way you can better understand exactly how much you can afford in monthly car loan payments.
You can find prices of new cars on websites such as CarsDirect.com, Edmunds.com or Kelly Blue Book. These websites will not only allow you to research new car prices but also figure out how much your existing car is worth if you're thinking about trading it in.
Comparing Car Loans
When it comes to new car loans it often pays to shop around. You're choices include credit unions, local banks, and automobile dealerships. Finding a lender that will pre-approve you for a loan will help you figure out if you can actually afford that car of your dreams.
When you're comparison shopping for a loan, make sure you understand the assumptions the lender is using - down payments, interest rates, term or length of the loan are all important factors to consider when comparing offers from different lenders. Don't ever be intimidated or be afraid to ask a lender for information that's vital to understanding the terms and conditions of the loan for which you're applying.
Car Financing Terminology
There are a couple of important financial terms you need to understand before buying a car and arranging for its financing. The following terms will typically appear either as terms and conditions on a loan or will be part of the loan origination process.
- Annual Percentage Rate - The annual percentage rate, or APR, is arguably the single most important factor to consider when comparing loans. The Truth in Lending law requires the APR to accurately reflect the total cost of credit and the way it's calculated allows consumers to make direct comparisons between offers. The APR is a standardized way of expressing interest rates and the lower the APR, the more attractive the loan.
- Amount Financed - The amount financed is defined as the total value of the credit used by the consumer. This would include the principal amount of the loan, plus any charges which are not part of the finance charge, minus any charges which are part of the finance charge but which will be paid before or at the time of the close on the loan.
- Finance Charge - The finance charge is defined as the total cost of the loan including interest, fees and credit checks. The finance charge is the total of all fees, and interest charged on a loan.
- Total Payments - The total payments amount is defined as the sum of the amount financed plus the finance charge.
- Payment Schedule - The payment schedule is the number, amount, and due dates for each of the payments scheduled to repay the car loan.
- Total Sales Price - The total sales price is the sum of the scheduled payments plus any down payment made on the automobile.
Discussing the above information with your lender and asking questions about each factor will help you get the best deal possible.
Auto Finance 101
Earlier we promised to demonstrate how an educated consumer can make a good choice when buying a car. We're going to do that using some of the online car loan calculators we've made available to you on this website and the following two examples.
New Car Financing Example 1 - Ford F150 Offer
Recently Ford offered the following two deals on their Ford F150 truck line. Consumers had the choice of zero percent financing for up to 60 months or a cash rebate of $3,545. So what is the best deal? We're going to use our simple auto loan calculator to help answer this question.
As mentioned earlier, the typical new car loan is for 92% of the purchase price of the vehicle. Let's assume you're picking a mid-range truck selling for $22,000. That means you're financing around $20,000.
Zero Percent Financing
Amount Financed - $22,000
Monthly Payments - $366.67
Interest Paid (0%) - $0
Total Payments - $22,000
Cash Rebate
Amount Financed - $22,000 - $3,545 = $18,455
Monthly Payments - $356.79
Interest Paid (6%) - $2,952.21
Total Payments - $21,407.21
This example demonstrates why it's so important to understand financing basics when buying a car. Even though zero percent financing sounds attractive, the cash rebate offers more savings in the long run. In this example you'd save nearly $600 by taking the cash rebate offer.
New Car Financing Example 2 - Hummer H2
In this next example we find out that Hummer is running a very similar deal on their H2 model line. But this time the deal is a bit more complex offering the consumer a choice of $1,550 in cash rebates with a 0% APR, 60 month loan or $2,450 in cash back with a 5.9% APR loan. The Hummer H2 starts at around $55,000. Once again, we're going to assume 92% financing which works out to just about $50,000.
Zero Percent Financing, $1,550 Cash Back
Amount Financed - $50,000 - $1,550 = $48,450
Monthly Payments - $807.50
Interest Paid - $0
Total Payments - $48,450
5.9% Percent Financing, $2,450 Cash Back
Amount Financed - $50,000 - $2,450 = $47,550
Monthly Payments - $917.07
Interest Paid - $7,473.92
Total Payments - $55,023.92
In this second example, once again we see the importance of understanding the concepts behind car loans and how to make intelligent choices between offerings. Here we see a difference of over $6,570 over the five year life of the loan.
Our hope is that these two examples along with the online tools we offer will help you make a more informed decision that can possibly save you thousands of dollars when you buy and finance your next new car. Finally, don't ever let a car salesman or lender force you into making a quick decision - after all you're the one that has to make all those monthly car payments.
About the Author - Car Financing Basics
Copyright © 2007 Money-Zine.com
|
Home 
