Financing Your Car

Car Financing

O.K. Let's get something out of the way right up front about car financing. It can be very expensive for you and pretty darn lucrative for a car dealer.

I'll get into actually negotiating the financing rate you pay a bit later.

For now let's get some basic automobile financing information under your belt first.

It's important to understand and determine what is an actual cost and what is not. If you purchase your car for cash (well if you do, you probably aren't reading this) .... say for $15,000 then the cost of financing the car is zero.... easy enough.

However if you borrow that $15,000 from a lending institution, that lending institution will not only want their money back over a specific period of time, but they will also charge you interest on that time it takes you to pay back the financed amount plus the interest charge. The principal that they loan you (the $15,000) isn't the finance cost..... the interest rate and the subsequent dollars that it equates to is.

Should you pay cash, take out a loan, or pay a percentage in cash and borrow the rest?

From a pure financial perspective taking on debt for a depreciating asset is never a good use of your hard earned money, but most of us need a car and most of us can't afford to lop down a wad of cash for one.

That said, obviously the more you can put down to offset the cost of financing your car the better. It used to be (way back when) you could deduct the interest you were being charged on your auto loan from your taxes.

It's true! ..... but never more.

So as long as the after tax interest rate on your car loan is higher than the after tax interest rate you can earn on your money - - - paying cash for your car is still less expensive than borrowing the money.

Determining the exact cost of your potential car loan takes a little bit of gonk-u-lating. There are a couple of factors that you should be aware of, or not forget about. For our purposes there are basically three basic constants when determining the cost of financing your car.

Now, I said they were basics.... so if you are an experienced car buyer this is a given.... but then again if you are experienced you would be gone by now.... so you guys and gals just beginning car buying here are the basics of car financing costs:

The higher the interest rate the higher your monthly payments will be. I know your thinking... Duh!? .....

But, here's the deal.

Sooooo many people buy a car based on the sales person getting you to agree to (really feel good about) a monthly payment range.
First of all BIG mistake.

Second of all, by the time you get into the F&I office for the signing of the finance papers, the F&I dude or dude-ett, now knows that they can push your financial envelop even further and bump your interest rate a point or even two... OR MORE!

Yikes!

And still be inside your 'monthly payment range' or just outside of it and still close you out.

There goes a long drive.... the ball park isn't going hold this one! Homerun!!! Finance Department.

The higher the amount borrowed, the higher the monthly payment, the higher the finance cost of your car. Reread the previous bullet point.

The longer the financing is stretched over time the lower your monthly payment..... and the higher the cost of financing your car.