Cars are expensive, but almost everyone gets loans to pay for them. To keep costs down, it's important to shop around for the cheapest loan you can get.
This is a good rule for buying a car: Make a down payment of at least 20% and don't pay for your car for more than 4 years. When you put down little money and sign up for an auto loan for five years or more, it's easy to get into trouble. Before you know it, you'll owe more on your car than it's worth. This is called being "upside down."
When choosing the length of a loan, it can be helpful to see what happens to your payments when they are spread out over a longer time.
Here's another way to lower your long-term interest costs: Opt for more-frequent loan payments. Ask the lender if you can pay every week, every two weeks, or twice a month instead of just once a month. Financial institutions figure out the interest based on the balance that is going down. Since the amount you owe goes down each month, so does the amount of interest you pay. If you make 26 payments every two weeks instead of 12 payments every month, more of your money will go toward paying off the loan's principal. So, your interest costs will go down.
Installment loans can have either a fixed rate or a rate that changes over time. When interest rates are going up, you're better off with a fixed-rate loan. The best time to get a variable-rate loan is when interest rates are stable or going down.
Another way to cut costs is with a buy-back loan. It's set up like a lease, and the monthly payments are lower than with a regular loan. How it works is as follows: At the end of the term you choose, the bank or financing company decides how much your car will be worth to sell. Then, it takes that amount away from the amount to be paid back.
Buy-back loans are similar to leases in that they are good for people who want to drive more expensive cars than they can really afford. People who say they own a car never really do. They instead change their loans every few years.
If you want to stop adding to your debt, you might want to move into a smaller home and drive a less expensive car. So, you can pay off the loan and still have something to sell when you're done owning the house.
