Are Auto Loans for Everyone?
The most important thing you should do to prepare to purchase a new or used car is examine your finances. Whether you plan on applying for auto loans or paying with cold hard cash, you need to know how much car your budget can handle. There are advantages and disadvantages to both paying cash and financing, so you will need to determine what is best for your financial situation.
Buying a car outright is much less complicated than taking on auto loans. You will not have any paperwork, no one has to examine your credit scores and reports, and you answer to no one. You also will not buy more car than you can afford. The car will be yours. You will possess the title.
Before you decide how much cash you want to spend on the car, however, you should ask yourself what you are sacrificing in order to purchase that car with cash. Should you be buying a cheaper car to save for a new roof, for example? Or perhaps it would be more advantageous to pay off your school loan in lieu of a new ride. Most people do not set aside “car money” in a jar on top of the fridge for years to save up. Instead, they have to cash out an investment or pull the money out of an account that may have a penalty. It is also possible that the cash you spend on that car could offer more investment opportunity elsewhere, particularly when you weigh it with some of the low rate auto loans dealerships are offering right now. But cash is simple. You will not take on debt to pay for that car and it will be yours the moment you drive it off the lot.
In examining the options offered by various auto loans, the most important thing to know is what you can afford. The easiest way to determine that is to calculate a budget based on your monthly spending. Start with your overall take home monthly salary. Next, add up all your necessary spending (loans, electric bills, phone bills, tuition, etc.) Deduct those mandatory expenses from your income. Deduct your optional expenses next (pizza money, pedicures, movie tickets, golf membership, etc.) Make sure you also include the amount per month you presently or hope to set aside for savings and retirement. Whatever you have left is what your budget can handle for a car payment. Do not forget that you are responsible for additional expenses such as insurance, licensing, gas, maintenance, parking fees, registration and a down payment to kick the loan off. You can role play with a cheaper or more expensive car and see what you are comfortable with. Thoroughly outline all the costs before you take on any auto loans.
Know what you can afford, regardless if you plan to take on auto loans or pay with cash. Stay firm on that limit. Put it on a yellow sticky and put it in your wallet. Dealers always try to talk you up with fancy bells and whistles and what appear to be fantastic deals. The dealer will not pay your bills for you. Be strong and protect your finances by knowing what you can and want to spend.