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How Big of a Car Loan Should I Take Out?

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Car loan terms are commonly offered for as few as 24 months and as many as 84 months. While a longer term can warrant a lower payment, it may not prove to be your most beneficial financial option.

Additionally, a borrower’s term and finance amount is based on credit, so you may not have all terms or the lowest rate options available to you. Consider your present and future finances before you purchase a car.

 

How Big of a Car Loan Should I Take Out?

How Big of a Car Loan

Your Budget

Before determining how big of a car loan you should take out, figure your monthly budget and the amount you can comfortably put toward a vehicle payment. DMV.org suggests budgeting all of your monthly expenses below 45 percent of your gross monthly income. This amount includes your costs for living, such as food, gas and insurance payments.

Once you figure your budget, enter in your vehicle pricing information into an auto loan calculator (Edmunds.com and the MSN Autos website offer one for free). This can help you determine your maximum loan amount to shop within your means.

 

Terms and Rates

Usually, lenders offer the same interest rate for loan periods up to 60 months. If you plan to borrow for a longer period, consider your future intentions and total payback amount. Seven years is a long time to own a car, and although it may lower your car payment for the vehicle you want, you will pay a higher interest rate.

A shorter term lets you can create equity in your vehicle sooner, allowing you to trade or sell privately when the time is right. Again, use an auto loan calculator to gauge the differences in payment and overall payback amount.

 

Get a Preapproval

Get a pre-approval before you set out to shop. This way, you’ll know your interest rate and the amount you can hope to borrow. You can pursue a pre-approval through any local bank by going in to fill out a loan application or calling to speak to the lending department.

Dealerships can mark up interest rates for profit, as much as 3 percent in some circumstances. If you plan to shop at dealers, having a pre-approval with you ensures the rate you already obtained, although the dealer may attempt to beat it to save you money.

Without a pre-approval, you might not know the real rate you qualify for.

 

Money Down

In most states, you can expect to pay taxes on your vehicle purchase. You can finance this amount, but it may not prove worth it. Other fees include title, registration, inspection and document fees or an extended warranty if shopping at a dealership. If you finance your extra costs, you will be paying interest on them, as well.

Every $1,000 you finance costs you about an extra $20 per month (with a fair interest rate) in car payment. In states where taxes and document fees are high, you might be looking at a $60 increase in payment if you finance extra fees.

 

Pre Qualify for an Auto Loan

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