How to Choose the Best Car and Auto Loan Terms

Financing a car involves many important decisions. Not only do you have to research the best car for your needs, the best insurance, but you must also determine how much you can afford in monthly car payments, and how long to pay off the loan.

To make the best decision when buying a new or used vehicle, you need to consider your budget for insurance, gas, and car payments, down payment, your future income, and depreciation of the car´s value. The steps below will show you how to choose the best car and auto loan terms, taking these factors into consideration.

Difficulty: Moderate

Instructions

1. For every car you are considering, calculate the approximate cost of insurance for each month. You can use online rate calculators offered by various car insurance companies.

2. Then, estimate the monthly cost of gas for each car. Do this by taking the number of miles you drive each month, dividing by the mpg of each car (miles per gallon), and multiplying by the price of gas per gallon.
   
   For example, if you drive about 500 miles a month, a car gets 20 miles per gallon, and gas costs about $3.50 per gallon, then the monthly cost of gas is about (500/20)x(3.5) = $87.50 for that car.

3. Now, use the numbers you computed in Steps 1 and 2 to determine the maximum monthly payment you can afford for each car, as well as the largest down payment you can pay up front. In general, the more you have to pay for gas and insurance on the car, the less you can afford to budget for car payments.

4. The next step is to figure out how long you should take out an auto loan. This depends on your future income, current savings, and the depreciation of the car´s value. If your source of income is uncertain, and you don´t have much savings to spare, you should opt for a shorter financing period.
   
   Likewise, if the car loses value rapidly, you don´t want a long financing period, since you will be making payments on a car that is worth less than what you still owe.

5. Understand the advantages and disadvantages of short loan periods. With a short car loan period, the monthly payments are higher, but you pay less in the long run. With long car loan period, the monthly payments are lower, but you pay more in the long run.

6. Once you have a good idea of what you can pay for each car, the next step is talk to car dealers and lenders about your options. By having concrete numbers in mind when you negotiate the sale and loan terms, you can keep your finances straight and avoid debt.