Drivin’ my life away

It seems to be coming more apparent that people really want to get out of the house.  And one of the things I’ve noticed is new cars. EVERYWHERE. I swear in the last week or so I’ve seen at least 5 cars everyday with the new car papers in the window.

Whether it’s new or used, we LOVE our cars. And now that spring has sprung and we are itching to get out, it can be very tempting to take the leap and get into a new vehicle.

It’s very easy to get caught up in the excitement when we are shopping for a new car. We tell ourselves we’re just window shopping and amble through the new car lots when the dealer is closed.car-lot_100234026_l Then we see it.  THE ONE. (Cue the angel chorus)  The car that makes our heart beat fast and our palms get sweaty.

Whoa, now.  Stop and take a deep breath.  Time to slow your roll and take a look at the whole situation. Good thing there’s no sales staff on hand, because this is the danger zone.  When our thinking shifts from “Is this a good deal for me?” to “How do I make this happen?”, we are in prime territory for making a big mistake.  Not to say that you can’t get that car, but there are a lot of things to look at before you commit financially.

First, what do you have for a trade-in or down payment?  You need to have an idea what you can put against the vehicle.  Lenders should not lend you the full value of the car, so you need to know what money/trade in value you have. Keep in mind other up front costs as well.

Next, how much does the car cost?  I remember when sticker prices were a new thing on cars.  Everybody lost their minds thinking that was ridiculous, wasn’t it better to negotiate a price?  Nobody really thought about how the cars were overpriced, knowing that the buyer would try to talk the salesman down. Regardless, the price of a car from a dealer is fairly set.  You can possibly negotiate a little, but unless they have a real glut of vehicles, you’re not likely to get far.

Once you know the price, and what you have for trade in, you can estimate what you need to borrow.  Then it’s time to talk to your lender. They’ll give you an idea what interest rate you’ll pay and what they require for a down payment.  Most lenders use a thing called Loan-to-Value, which is the percentage of the value of the collateral that the loan can cover.  If the lender’s maximum loan to value is 80% that means on a $20,000 car the most the loan can be is $16,000.  The buyer needs to cover the difference.

There are many loan calculators online that can help you to find out what your payment would be under various circumstances.  The lender can help with this as well.  But there are a couple of other things to keep in mind here too, which are the payment amount, and the length of the loan.

THE LOW MONTHLY PAYMENT IS NOT YOUR FRIEND.  Most of us are attracted to the lowest payment, but what that adds up to is a higher interest amount paid overall. You want to pay the highest payment you can afford over the shortest loan term or length.  And speaking of that, it’s a good idea not to go over 5 years or 60 months on a car loan. Because of the way loans are amortized or paid down, at the beginning of a loan, most of the payment goes to interest.   That car (especially if it is new) is going to lose value more quickly than the principle of the loan is paid down.  It’s very likely that you’ll end up underwater on that car loan if the loan goes out past five years. Underwater is when you owe more than the car is worth. And if you decide you want to get out of that loan, you can’t sell the car for enough to pay the debt. This often happens with people who don’t take the time to think through the purchase, and find out later that they can’t really afford that vehicle.

Another thing to keep in mind is what we call the Debt-to-Income ratio. Payments on debt should be no more than 20% of our income. This doesn’t include a mortgage payment (that’s housing), but does include every other debt, like student loans, credit cards, personal and other loans. It’s a stopgap that can prevent us from getting in over our heads with debt.

And then, once you have the car, keep in mind you still have to pay tax, title, and license, and your insurance will go up on a newer vehicle. There may also be up front fees on your loan. Be sure to put those expenses into your budget.

So, are you ready to take the leap?  Not sure?  The counselors at the Center for Financial Resources can help you crunch the numbers.  Contact us at 1-888-258-2227 or online at www.lsssd.org.

Written by Sylvia Selgestad, Financial Counselor and Educator

Photo credit: thecarconnection.com

LSS Center for Financial Resources
Consumer Credit Counseling Service | Housing Resources | Sharpen Your Financial Focus | Financial Fitness Education
705 East 41st Street, Suite 100 | Sioux Falls SD 57105-6047
605-330-2700 or 888-258-2227
Strengthening Individuals, Families & Communities

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