Car Finance Loans

While the first two points we discussed on car finance loans  are fairly elementary, the third point many times is what gets people into difficulty when they opt to finance their car this way.

Automobile sales people are trained to find a monthly payment that they can get you to agree to.

Sounds innocent enough, but if work your way into your dream car negotiating monthly payments, you'll lose.... and could lose big.

One of the ways is the amount of financing costs you'll pay over the life of the automobile loan.  Not to mention how much longer you'll remain 'upside down' or 'flipped' in your car (more later).

So, even though those monthly payments may look attractive.... be very afraid... you should NOT be buying your next car based on where the dealership can get your monthly payments to land!

Buying time costs you money!

Buy your car based on how much you are willing pay for the car and how much you are willing to pay for the financing..... NOT based on a monthly payment. If you stay focused on the price and the financing and you have done your homework on your credit and interest rates, you will know what your monthly payments will be and you will know if you can afford the car.

Sometimes examples with numbers work better so perhaps it is easier for you to digest the numbers with an example.

Let's use our $15,000 car financing loan at 8%. Now I know that 8% seems high with the going interest rate now, but I use the 8% as an average over the past several years and if you are financing a used car, you won't get those super low new car rates that are out there at the time of this writing.

O.K. $15,000 at 8% over a 5 year loan will lower your monthly payments by $62 when comparing these same numbers to only 4 year automobile loan.

But, in financing circles, borrowing time is not without cost. The 5 year car loan in this example is actually going to cost you $672 more over the life of the loan than the 4 year loan!

Definitely something to consider when looking the financing costs. Time will cost you money.

With the price of new cars (and used cars) constantly rising, lending institutions along with automobile manufacturers have been forced to get more creative with their car financing options in order for you to be able to afford those monthly payments (but remember you don't car shop based on monthly payments).

The most common way for dealerships to accomplish this is to offer extended time on their car loans. Today 72 months is not uncommon. WOW! Six years to pay off your car loan! And it will probably get even longer. Not for you..... right?

Now, let's throw our old friend depreciation and the drop the car's depreciation value into the mix here and take a look at how these longer financing periods with these very attractive 'monthly payments' are going to affect your financial position in the car.

Earlier, I tossed out a couple of terms; 'upside down' and 'flipped' in your car. I'm sure most of you have heard of these terms, but you need to take a hard look at this when you are financing your car.

Simply put, the longer the term of your car loan, it is going to take you longer, much longer to get yourself in a positive equity position in the car. Meaning the trade value of your car is actually greater than what you owe on your loan.

Remember, the goal is to get all the pieces to fit for you and the longer you stretch your 'monthly payments' out the longer it will take you to catch up with the depreciation cost on your car...... hence the longer you will remain 'upside down' in your car, the more the financing will cost you, and when you get the urge to trade for your next car the tougher it will be to do so....

and if you manage to roll your negative equity into your next car (and by the way, the dealer will be more than eager to give that a shot) you'll be even further behind the car financing eight ball!

Let's talk about getting the lowest car loan cost next...