Auto Loan Guide: Smart Car Buying
Don't walk into a dealership unprepared. Monthly payments can be deceiving—salespeople often extend the loan term to make the payment look small, while hiding the fact that you're paying double in interest.
The Danger of Long Terms
Avoid 72-month or 84-month loans if possible. Cars depreciate rapidly. If your loan is too long, you'll be "underwater" (owe more than the car is worth) for years. Ideal term: **36 to 60 months**.
The 20/4/10 Rule
A classic rule of thumb for affordability:
• Put **20%** down.
• Finance for no more than **4** years.
• Keep payment under **10%** of monthly income.
Hidden Costs to Consider
- Sales Tax: Usually 5-10% of the car's price.
- Title & Registration: Fees paid to the state DMV.
- Insurance: Sports cars and luxury vehicles cost more to insure. Check quotes *before* you buy.
- Maintenance: European luxury cars often have higher repair costs than reliable Japanese or Korean brands.
Dealer Financing vs. Bank/Credit Union
| Source | Pros | Cons |
|---|---|---|
| Dealership | Convenience (one-stop shop), sometimes 0% APR promos. | High markups on rates if you aren't careful. |
| Bank / Credit Union | Often lower rates, pre-approval gives you bargaining power. | Need to arrange paperwork yourself. |
Gap Insurance Explained
If your car is totaled in an accident, standard insurance only pays the *current market value* of the car. If you owe $20k but the car is worth $15k, you still owe the bank $5k. **Gap Insurance** covers that difference. It's worth considering if you make a small down payment.
