Auto financing loans can be a huge headache. There are so many variables involved. Do I purchase with cash or finance, buy new or used, etc? I will tell you how it is and what you should look for.
Know how much you can afford
First, how much car can you afford? That is a good question and it depends on the following factors:
- Debt to Income Ratio (DTI)
- FICO Score
- Loan to Value Ratio (LTV)
- Simultaneous Car Notes
Do you want to look cool in a fancy depreciating asset to impress people? You certainly can but it will affect your debt to income (DTI) ratio.
Generally lenders look for DTI to be lower than 35-45%. As it gets higher, the harder it is to get approved. If you can bring on a co-signor, it can greatly help your DTI.
The formula for DTI is (total monthly cc/rent/mortgage payment) + monthly new car loan payment) – monthly pretax income
Finding the perfect vehicle is one thing, overextending your income to look cool is another. Calculate how much car you can afford prior to going to the dealership or negotiate through a private party.
New vs. used
You need to ask yourself a few questions. Are you the type of person who wants a fancy BMW, Mercedes, or European car to impress your friends and neighbors? Or are you practical and reliability is your main motivator? Is getting from point A to point B your main objective and not getting caught up in trying to look cool, stuck in traffic? A car will be one of the worst investments that you will ever make. If you purchase new, that sucker will depreciate 10-15% or more as soon as you drive it off the lot. And it will continue to depreciate for the life of the car. Typically, finding a used car that is 2-3 years old is a good option for some. The car would still be in pretty good mechanical condition, under warranty, and depreciated.