Is it better to purchase a vehicle by paying the full negotiated price upfront, or should I put a significant down payment and finance the monthly payments? I know cars tend to depreciate and was wondering what was the best route to take.
In almost every situation it is cheaper for you in the long term to save for the vehicle you want and then pay cash. In other words, avoid financing the purchase of a vehicle if you can.
First, the interest expense on a vehicle loan is not tax deductible, and vastly inflates the total cost of ownership of the vehicle.
Second, new vehicle depreciate at a surprising rate, which is usually faster than the decrease in the balance of the loan for most new-car loans. The result is that if you need to sell the vehicle you will owe more than it is worth. This is known as being "upside down" or "under water" on the loan. Being upside down limits your options in the future.
Third, when may people buy a car they look at the monthly payments, and not the total cost of ownership. If you wait and save a lump sum for the purchase, there is a greater likelihood that you will buy a cheaper vehicle -- probably a used one -- that will result in a lower cost of ownership.
Here are some vehicle buying tips if you do choose to finance a vehicle purchase:
The basic car loan is short-term or long-term. Long-term loans are available primarily for new vehicles, whose loan terms can go up to 84 months. Used-car loans typically max out at about 48 months. A seven-year loan offers lower payments, but by the end of the loan term, the warranty is likely to have expired, and the car owner will be paying for maintenance in addition to the loan payments. Selling the vehicle before the loan is over risks being upside down. Most buyers are better served by a less expensive vehicle with a shorter loan term.
In today's market, a "home equity auto loan," a loan from equity to purchase a vehicle, is ill advised. While there may be some tax advantages, in the long term, the equity in a home is more precious than a car. Consult a tax or financial adviser before considering this type of loan.
Buyers can choose financing through an auto dealer, a bank or a credit union. Contact different financial institutions to check loan rates and get pre-approval for a loan that fits your budget. Usually, auto dealer financing is the most expensive option -- but also the easiest to get. These loans typically are not financed by the dealer itself, but by a large financial services company that has a relationship with the dealer.
Just as in the mortgage industry, "subprime" loans are available to those with "little or no credit" or with low credit scores. The tradeoff for the lender's higher risk is a higher interest rate (cost) to the buyer. If possible, buyers will benefit from working to improve their credit and obtain a better interest rate.
Some advocate charging a car purchase to a credit card to accumulate "rewards" for airline miles or other benefits. This is a bad idea.
A trade-in counts, but often, auto dealers offer a low price on the trade, because the dealer must recondition the vehicle to make it saleable at a dealership. If a buyer still has a loan balance on an older vehicle, the dealer will assure it is no problem -- and roll the previous loan amount into the new financing. Most vehicle owners are better off selling the vehicle themselves. Then you can apply any profit to the new loan.
Ask for all the details: the interest rate, when payments start, how you will be billed (so you do not miss your first payment), the total amount of each payment, the total number of payments, and whether there are penalties for paying the loan off early. Ask if there are any hidden charges. Know the exact amount you are paying, and the amount that will be going to interest.
Very important: Be sure the deal is not contingent on the approval of a third party for the financing. Sometimes, dealers invoke this provision –- they will call in a day or two and say the first finance company declined, but they have another lender at a higher rate. Have everything finalized before you drive off the lot.
To learn more about vehicle loans, see the Bills.com auto loan center.
I hope this information helps you Find. Learn & Save.