When you are approved for a car loan the lender typically
will set the maximum monthly payment for which the loan is approved. Generally,
the maximum payment is either 12% to 18% of your gross monthly income or 45% of
you income less your monthly obligations.
Other items to include in the budget are the total cost of
ownership of the vehicle. When comparing the total cost of a vehicle consider
such things as insurance rates, gas mileage, and repair costs. To mitigate
repair costs we recommend including an extended service contract with the
vehicle at time of purchase.
Consumers with a poor Fico score pay higher finance rates
than consumers with Fico scores above 700. If you have a Fico score below 700
we recommend buying a car that meets your basic transportation needs. Wait
until your Fico score improves before buying a more expensive automobile.
If you have a low credit score we recommend selecting with
the shortest repayment term possible. This will allow you to trade out of the
vehicle, and finance another car at a better interest rate, much quicker if
your credit improves.
If you have negative equity, consider buying an affordable
new car with a cash rebate. A lot of folks in Arizona fall into the negative
equity trap. This cycle occurs by continually buying more expensive cars and
rolling negative equity from their pervious car loan into their next auto loan.
In fact the only way to avoid rolling money on to your new
loan is to own you car until the lien is paid, use enough money down to cover
the previous lien, or buy a car that you can pay off fast. We should also
mention that in most cases, if you the money you own on your used car trade in
is greater than the lien amount, it is probable that your new auto loan payment
will be higher than the payment on the vehicle you are trading in.