Car-Buying Advice: Tips for Calculating “On-Budget” Loan Payments

CarFinance.com (www.carfinance.com) today released the third in its series of auto financing tips specifically designed to help empower car buyers with below-prime credit – this time providing advice on calculating potential auto loan payments that will keep them on budget by identifying the car, and monthly loan payment, they can actually afford.

It’s a whole new post-recession lending era for the hundred million+ Americans that now fall into the below-prime credit category; especially for those that want to jump into the summer new-car buying season, when automakers offer incentives to clear 2012 models off the lot. Credit lines are opening up (with average credit scores on vehicle loans dropping to near pre-recession levels1), interest rates for less-than-prime buyers are lowering and loan terms are getting longer2, making monthly payments more manageable.

“Buying a new vehicle, and sticking to on-time monthly payments, is one of the top weapons in building back a credit score, but correctly figuring out that payment can be challenging,” said CarFinance.com president and CEO Jim Landy. “To help car buyers make informed budgeting and vehicle selection decisions, CarFinance.com offers key tips and tools to help them know how, and what, to calculate before signing on the dotted – or electronic – line.”

CarFinance.com’s Top Tips for Calculating Loan Payments

1. MONTHLY PAYMENT: Understand what level of monthly payment you can afford by doing a detailed, hyper-honest budget-setting exercise. Take your monthly income minus all payroll tax or estimated monthly tax deductions, then subtract EVERYTHING: monthly mortgage payments or rental costs, credit card and other loan payments, health and car insurance (calculating how much more the latter will be with the new car) and get serious about estimating real-world living expenses (from food to fun, etc.) by looking at the last 6 months of your real spending (bank statements, withdrawals, checks, etc.) from your monthly income. What is left over is what you can afford each month.
2. KNOW YOUR APR UPFRONT: The higher the APR (Annual Percentage Rate – the cost you will pay on the loan, including your interest rate), the higher the monthly payment – and the more you will ultimately pay for the car. Waiting until you get to the dealership to find out your APR could mean you drive off in a vehicle that you can’t afford. The good news is that today you can get pre-approved online for a loan in minutes, providing you with key numbers, including your APR, to help you make a rational decision on which cars you should be looking at.
3. LENGTH OF LOAN: Using this calculator, you can determine how long it will take to pay off your loan based on the monthly payment you can afford and your APR. For a given amount financed, the lower your monthly payments, the longer the term of your loan, but the longer the term, the more interest you pay, meaning you will ultimately pay more for your vehicle. Calculate what you will be paying overall to determine if you are willing to pay extra in the long run in order to pay less each month, or if you should look at a lower-priced vehicle.
4. REBATES VS RATES: Understand the difference between the benefit of a cash rebate versus lower monthly interest rate before including it in your calculations. In many instances, you have the option of a manufacturer cash rebate or a low APR. While a low APR sounds enticing, remember that a cash rebate decreases the price of the vehicle, thereby lowering the amount you need to borrow, reducing your interest expense and less overall $$$ spent in the long run. If you trade your vehicle in early, you can lose much of the benefit of the low interest rate. Plus if you have less than perfect credit you may not be eligible for the low interest rate anyway.
5. TOTAL PRICE OF THE VEHICLE YOU CAN AFFORD: This is the holy grail and to calculate this using one of the many calculators you can find online, such as this one, you will need to allow for your down payment, monthly payment, APR, and the realistic price of the vehicle you are interested in, as well as trade-in (be sure to do your research to get a realistic sales price, whether you are selling the car yourself or trading in), rebates, sales tax, and loan term. You also need to allow for title and licensing fees; a good rule of thumb is 10% to 15% on top of the selling price. But remember, fees vary by state, from as little as $50 to as much as several thousand dollars depending on the state and the value of the vehicle.
6. GO SHOP: Now that you know what you can afford, you can research online on sites like Edmunds.com to find vehicles that fit your budget. Many online sites offer a search by monthly payment or search by the amount you plan to spend; just be sure you are using the amount that you can afford and that their formulas take into account all the information you have accrued. Once you have found the vehicle that you can afford and want to buy, go ahead and get financed online so your conversation at the dealership is about the vehicle itself, and not the financing.

To access easy-to-use online auto loan calculators, click here.