We're a nation of drivers, and a lot of us are going into debt for it. According to the Federal Reserve Bank of New York, Americans owed $1.2 trillion Opens in new window in auto loans in 2017. But the cost of ownership is more than just an auto loan. Vehicle registration, insurance, maintenance, and fuel efficiency also contribute to the total cost. With that in mind, what is your monthly budget for your car?
Knowing your numbers gives you a purchasing guideline, and knowing the tradeoffs to each option will help you compare deals.
The pros and cons
Buying a used car will almost always be the cheaper choice up front. The perks can include a lower sticker price, a higher trim level for less money, and sometimes, lower insurance costs. The downsides include potentially higher maintenance costs and fewer, if any, warranties.
You can buy a used car from a dealer or from a private seller. Private sellers don't offer financing, so be prepared to pay in cash or to arrange your car loan through a local bank or credit union.
If buying a new car feels like the right choice for your family, it's going to require savvy negotiating skills. New cars are in perfect condition, have more options for financing, and offer custom colors and features. Some new car dealers throw in perks that have real value (like free oil changes for a year and 0% financing). If you don't care for certain upgrades like a sunroof or premium wheels, you have the option of choosing a cheaper trim package. However, new cars depreciate in value quickly.
When comparing vehicles, you'll want to take into account all of the financial impacts of each choice.
How car choice affects auto loans
Auto loans are pretty simple; you borrow a set amount of money for a set amount of time and agree to pay it back, plus interest. The type of car you buy will influence the overall size of the loan, but it also affects the interest rates that are available to you. In general, used cars garner higher interest rates.
Your interest rate is crucial to saving money on a car. Auto loan interest rates can vary monthly, and they have increased in the last couple of years. According to Edmunds Opens in new window, February 2017 saw average interest rates on new cars at 5.2%, up from 4.9% in February 2017. Jerome Powell, the Fed Chairman Opens in new window, also appeared in front of Congress in February 2017 to say that more interest hikes are expected this year.
However, there are some factors within your control that can affect your interest rate, including the length of the loan, your credit score, and your debt-to-income ratio.