Auto Loan Purchase

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You shouldn't spend more than 20% of your monthly income towards your vehicles. That includes all vehicle payments, insurance and maintenance. It doesn't matter what type of other debt you have. Even if you have no other debt, you should stick to the 20% rule.

Cars are not a good investment. The minute you drive a new car of the lot, it can lose as much as 45% of its value. Cars are depreciating constantly. Listen, can you hear it? Your car is sitting there right now going down in value.

That means that you don't sink the majority of your income into a vehicle. You'll never see all of the money again.

To calculate your monthly payment, include the purchase price, the down payment, interest rate and term of your loan. All of these items affect how much car you can get for your money. If interest rates are low, you can buy a more expensive car to fit into your budget limit. When rates are high, you may not be able to buy such a costly vehicle.

Your down payment will affect the size of your monthly payment. It used to be that you had to make a down payment. Today, down payments are pretty much optional for those with good credit. Car companies and dealers want your business so badly, that they will often waive the need for a down payment.

The more down payment you provide, the lower your monthly payment. So, you can afford more car and still be under the 20% limit. But don't forget that you are still spending money on an asset that is constantly decreasing in value.

Keep in mind the amount you can truly afford to pay. You have to figure in your insurance rates, fuel costs, maintenance and repairs. These can often add up to more than your payment!

Some models cost more to repair than others. Insurance rates vary widely from model to model.

If you are buying a new car, you will have a warranty for a while. This can save you a lot of money. Look at the fuel costs and gas mileage of the vehicle also. Today's gas prices can dictate what type of vehicle you can afford to drive.

Automobile Loan Payment Calculator This calculator will compute the monthly payment of an automobile loan. Vehicle price ($): Down payment ($): Interest Rate (%): Number of payments (# months): Loan amount: Monthly payment amount:

Buy or lease - which works best for you?

Buy a brand new car for only $180 a month!

Sounds great - a low monthly lease payment may seem much more attractive than buying a car. But you should be cautious, whether buying or leasing, to make sure that you choose what is right for you.

If you are someone who just has to have the latest model, you might look into leasing. Leasing is a good option if you put fewer than 12,000 to 15,000 miles a year on your car, and you are religious about maintenance. In return, you receive a lower monthly payment.

You must remember always, you do not own the car. When the lease is up, you either return the car or pay a balloon payment to buy it outright. The purchase value is usually preset in your contract. You could also trade it in for a new lease.

There are some advantages with buying the vehicle instead of leasing. If you treat it right, and get a good financing package, the vehicle will usually be worth quite a bit when you finish paying for it. In as little as three years, it may be worth more than you owe.

Most people must finance a vehicle for at least four and even five years to make the payments low enough. By the time you are finished with your payments, your car may be well worn.

If you drive more than 12,000 to 15,000 miles a year, you may not want to lease a vehicle. If you go beyond the contractual mileage, you will have to pay hundreds, even thousands, in extra mileage fees.

If you want to reach a point where you don't have a car payment, then you don't want to lease. If you don't mind the payment, the leasing will allow you to get a new car every three years without making a substantial down payment.

Taking good care of a leased vehicle is essential. The contract requires that your return the vehicle in good shape, fully maintained. If you plan to modify the vehicle in any way, you could find that the leasing company will want compensation.

Look at your life. If you see that changes are coming, you may be better off buying. If after two years you need a larger vehicle, you will pay a bunch of money to break the lease. Buying gives you a better way of changing your mind.

Buying a new car vs. buying used

While it is nice to think of just buying a brand new car, most people buy used. Three times as many used vehicles are sold each year than are new cars. Your budget and attitude determines what is right for you. If you can't decide, here are the benefits and drawbacks when buying used and new.

Benefits of a new car

You will receive a comprehensive manufacturer's warranty of at least three years or 36,000 miles. Some even go as long as 10 years or 100,000.

A new car will have the latest safety, comfort and convenience features available. You are the first owner and will face no surprises that have been hidden from you. You don't have to worry about mechanical problems or hidden accidents

New car drawbacks

A new car cost significantly more than a three-year old used car. It even goes beyond the purchase price. Comprehensive and theft insurance costs are usually higher when buying new, even though discounts are available for newer safety features.

Have you heard that the moment you drive it off the lot, it is no longer worth what you just paid? It's true. A new vehicle will lose 25-40% of its value immediately. This means that you have to own it longer to recoup your loss. This could mean that you can't trade it in when a new model looks better next year.

Benefits of a used car

Used cars are much cheaper than a new model. Your comprehensive and theft insurance costs are less with a used car. The car has already faced the majority of its depreciation when it was first purchased, making your loss in car value less. You may be able to afford a higher priced package for the same price as a new standard package vehicle.

Used car drawbacks

You don't have any idea of the maintenance and repair history of a used vehicle. You won't usually find a new-car warranty for a used vehicle. If you do, often you have to pay for it. You will usually have higher maintenance costs due to the higher mileage on many used vehicles. The safety and convenience features are not as new or as nice.

Decision time: buy or lease?

So everything looks good. Your credit score has reached new heights and you are ready to have a new car. You've don't the research and settled on what you want. Now, do you want to buy it or lease it? It's all up to you.

Leasing does make for lower monthly payments and no down payment. For example, you purchase a new car for $24,000. You make a $3,000 down payment and by the car. You finance $21,000 for 48 months at 2.9% interest. This equals a monthly payment of $464.89.

Okay, let's say you decide to lease the vehicle instead. You pay the same interest rate and down payment. You don't have to pay off the $21,000 in four years. You simply pay the amount the car depreciates over the four years, plus the leasing fee.

An auto lease payment has two parts: the depreciation payment and the leasing fee. On this vehicle, you take the $21,000 and subtract the residual value, which is the amount the lender says the car will be worth in four years. Let's say they say that your residual value is $10,000. You will have to pay the $11,000 that the vehicle depreciates over 48 months. That equals $229.16.

Then you have to add the leasing fee. This is kind of like interest. You take the capitalized cost (minus the down payment), add the residual value and then use the equivalent of 2.9% to find the leasing fee. The equivalent is .0012 and your fee calculates to $39.20.

Your total monthly lease payment will be $266.36.

That is a savings of $197.53 a month - almost 40%. But keep in mind that you are only "renting" the vehicle. At the end, you don't own anything.

When you buy a new car, the value of the car depreciates from the minute you drive off of the dealer's lot. Now it's a used car. So if you buy a new car every few years, you would loose a lot on your investment. By leasing, you can drive a new car and avoid the significant loss of value.

Top 10 dealer tricks

The majority of dealers aren't looking to rip you off, they are just doing there job. And they have many tricks to maximize the dealer's profit.

Here are the top 10 tricks that dealers use to get the most out of you.

1. The credit score situation.

The dealer will tell you that your credit score isn't high enough to qualify for very good financing rates. This might be true, but often it's not. They will imply your credit is bad to get you to accept a higher interest rate. You must know your credit score before you go into a showroom. You might even want to take a copy of it with you.

2. The single transaction action.

Many people think that buying a car is one transaction, and the dealer knows that. But it's really three transactions: the new car price, the trade-in value and the financing. The dealer is looking to make money at each separate step. They will negotiate each one. If you get a new car for just a little over invoice, but receive much less on your trade-in than it is worth, you haven't negotiated each step successfully.

3. The payment strategy.

The dealer will tell you the monthly payment that you will have. But you need to know how that down payment was calculated. He may be figuring a large down payment, or may have stretched the term to 72 months. Focus on the overall price before you look at monthly payments. Never tell how much you can pay per month. Instead, stick to how much you can pay for the car.

4. The sticker ploy.

The sticker price on the car is known as the MSRP, or the manufacturers suggested retail price. It doesn't mean anything. What you need to know is the invoice price, or what the dealer paid for the vehicle. Working your way up from the invoice is better than working your way down from the sticker price.

5. The holdback highroad.

Manufacturers give cash incentives, called holdbacks, to their dealers to encourage them to sell models that aren't selling so well. This isn't mentioned in advertisements. You want to find out the holdbacks or other factory incentives for the car you are looking at buying. The dealer might not give you any of these funds off of the price, but it doesn't hurt to ask. Plus it only makes you look all the more knowledgeable.

6. The financing flush.

Some dealers have been known to call customers after they have signed the purchase agreement to let them know that the financing fell through. It's not the truth. The dealer knows if you qualify for financing before you leave with the vehicle. They want to sign you up with a higher interest rate loan, because they say they just found out that you don't qualify for the lower rate. Never leave the showroom without all of the paperwork signed out and every blank filled in. If you've got it all in writing, they can't back out of anything.

7. The insurance illustration.

Some dealers want you to buy an insurance policy when you are buying the car. There's one type called gap insurance than they will push. It covers the difference between what the car is worth and the amount owed on it. If you total the vehicle and it is worth less than what you owe, the difference will be made up by the insurance. Don't just agree to it. Your regular comprehensive auto coverage may already include it. It's usually cheaper through your regular insurance company.

Another favorite is credit life insurance. This pays the balance of your loan if you die before it is paid off. This might work for you, but in most cases you should decline the offer. If you want this coverage, make sure that you understand what you coverage you are purchasing. Shop around; usually the dealers mark these policies up a lot.

8. The rate run-around.

Zero-percent interest may sound great. However, it may not be all that it seems. For starters, to qualify you must have great credit. The financing is usually for a shorter term, which makes your monthly payments sky high. And often, you are better off finding your own financing and taking the dealer rebate.

For example, you are looking at a $20,000 car and you will get $4,000 on your trade-in. You can either choose zero-percent financing, or financing at 3.49% with a $2,000 rebate. The length of the loan is 36 months. If you take the rebate, you will come out ahead by more than $1,200. Make sure that you figure out all the numbers before you agree to anything.

9. The rollover razzle-dazzle.

You can move on to a new car, even if your existing car isn't paid off yet. Some car buyers do this buy "rolling over" the remaining payments on their current car into a new loan or lease. This is risky. You will owe more on the second vehicle than it is worth. If it is totaled or you want to trade it in, you'll pay to cover the remaining amount of the loan. Just don't do it.

10. The long-term expansion.

Loans are being stretched out to six and seven years today. After all, longer loans mean that your payments are lower. But it's not a great idea. Your car is depreciating faster than you are paying it off. You will end up paying more in interest too. If you can't afford it, you can't afford it. Look at a less expensive car and a shorter term.

11. The balloon pop.

Lots of dealers can get you into a new car for really low monthly payments now, with a balloon payment at the end that you can pay off or refinance. This could work for you, but usually you won't be able to pay it when it comes. Then you refinance again and just end up paying too much in interest and fees.

Straight talk on extended warranties

You've been there for hours. You've thoroughly studied every picture in the dealer's office. You're feeling numb from long negotiations. You are ready to just give in and get your new car so that you can drive home fast.

Top 10 leasing booby traps

Just because you are leasing a car instead of buying, don't assume that you don't have to be on your toes. You should still be skeptical about promises that sound too good to be true. Leasing is still a financial commitment and many consider it to be more responsibility. You are still signing a binding contract, so you must be vigilant in negotiating and checking all the terms. When you buy a car, you can sell it if you don't like it. When you lease a car, you are stuck with it throughout the lease term.

Here are the top 10 booby traps when leasing a car:

1. Mileage meltdowns

When leasing a vehicle you are allowed a certain number of miles each year. Often dealers will offer a low-cost lease, but set the mileage allowance low - like at 10,000 miles per year. If they charge 10 cents to 20 cents for every mile you go over and you drive 13,000 miles a year, it will add up. For a three year lease with a 20 cent per mile overage charge, you will owe the dealer $1,800 for those miles. That figures in at an extra $50 a month.

2. Early-termination tango

Dealers will lure customers into a new lease by saying that you can get out of your existing lease early. You can, but you will pay for it.

For example, you lease a $20,000 car. In two years, you've paid $2,400 in payments. The car has depreciated to $16,000. To terminate the lease, you will have to pay the difference between the $2,400 you have already paid and the amount of depreciation ($4,000). You will owe $1,600.

Some leases may require that you pay all of the remaining payments. A dealer may suggest that the payments just be wrapped up into the new lease. This means that you will end up paying much more.

3. Residual-value runaround

The residual value - how much the car is worth at the end of the lease - is a critical factor in leasing a car. For instance, the dealer figures that the car is worth $20,000 will be worth $10,000 in three years and calculates your monthly payments to cover that loss in value. Different lenders will calculate the residual values differently.

A lower residual value leaves you with a higher monthly payment. With a $15,000 residual value on a $25,000 car, you will have to cover the $10,000 difference. In a 36 month lease, your monthly payments would be $277.77, plus any interest, taxes and leasing fees. If a different lender figures that the car will only be worth $13,000, your monthly payments jump to $333.33. A lower residual value is good if you decide to purchase the car at the end of the lease. Then you will pay the residual value, plus any purchase-option fee.

4. Down payment double talk

Many leases that are advertised with very low monthly payment are hiding a huge down payment in the fine print. You should keep in mind that your monthly lease payments aren't the total cost of your lease. Factor in the down payment. If you put $4,000 down on a 36 month lease, your real cost is around $111 more than your monthly payment. A dealer may set up your monthly payment incredibly low and just raise up the down payment requirement. If you make big enough a down payment, you won't have to make any monthly payments at all.

5. Purchase-price parade

Some dealers will try to get you into a lease contract by comparing the payments you would make under a lease with the payments you would make to purchase the car. Keep in mind that the main difference is that at the end of the purchase term, you own the car. When the lease ends, you own nothing.

6. Price doesn't matter ploy

Even though you aren't buying a car, just leasing, you still have to worry about the price of the car. Your monthly payment is based on the price of the car. A car selling for $24,000 has a capitalized cost of $24,000. Its residual value is $12,000 in three years. Your monthly payments will be $333 to cover the depreciation. But if the cost is $22,000 instead, and the residual value remains the same, your monthly payment becomes $278 a month. Each month you will save $56. Make extra sure that the capitalized cost is not more than the MSRP.

7. The fee focus

You need to know the amount of fees that you will pay in addition to your monthly payments. These fees can include acquisition, purchase option and disposition fees. Acquisition fees, or document fees, are charged at the beginning of your lease. They usually total to $500. A disposition fee is charged upon the return of the car. This covers the dealer's cost to dispose of the car. These fees can be several hundred dollars. The purchase-option fee is the amount it would cost to purchase the car at the end of the lease. The amount varies and depends on the residual value. These fees are one time, but they still affect the overall cost of the lease. You should negotiate everything and consider them in your decision.

8. Hidden-cost hideaway

Don't assume that the monthly lease payment that you are quoted is what you will be paying. It could have added sales tax or license fees. Ask what other ongoing charges will apply, so that you don't have a shock when the first payment is due.

9. Term trick

A dealer can get you to accept their deal at a higher price by simply manipulating the term of the lease. For example, you are looking at buying a car with a sticker price of $25,000. You haggle down to $22,000 and the dealer sets the residual at $12,000. That means that your 36 monthly payments will be $277.77 plus any taxes, interest and fees. But you try to get the price down by telling the dealer you can only afford to pay $250 a month. He goes and talks to the manager for you and says he can do it. But the term of your lease has now gone up to 40 months, and he probably won't point this out. You haven't saved anything.

10. Interest rate confusion

There is no annual percentage rate for a lease. No matter what. If you are told there is, it is either illegal, inaccurate or not really APR. The dealer may try to confuse you about APR and the "money factor."

The money factor is similar to an interest rate, but it isn't quite the same. It determines how much you will pay in finance charges over the life of the lease. The higher the money factor, the more you will pay. It is written in a decimal such as .00260. You can convert it to an equivalent interest rate by multiplying it by 2400.

An untrustworthy salesperson may try to tell you that you have an APR of 2.6 on your lease. Then he applies the money factor of .00260. You think you are paying 2.6% interest. But you aren't. Multiply .00260 by 2400 and you will find that you are paying 6.24% interest equivalent.

You can take the amount back the other way too. If a dealer tells you that they will equal the rate you've been offered by a bank, take the rate and divide it by 2400. For example, if your bank says that you can have a rate of 6%, divide it by 2400 and you have a money factor of .0025. Then ask the dealer what the money factor is and if it is higher than .0025, then you know that the equivalent interest rate is higher than 6%.

When leasing a vehicle, ask the dealer about the money factor on their leases. This isn't something that they routinely disclose. It may not even be in writing on your lease contract. If the dealer will not tell you, go elsewhere.

Pros and cons of leasing

Whether or not a lease makes sense depends on your situation. There are significant advantages to leasing. You can often get into a lease with a lower down payment. You are only paying off the depreciation and a leasing fee, so your monthly payments are also less.

When you reach the end of your lease, you don't have to bother with selling it or trading it in. All you have to do is return it to the dealership.

But, you have to be aware of the drawbacks as well.

Leasing is a lot like renting your home - you will never own it or build equity. If you continually lease, you will never be without a car payment. Someone who buys a care and takes good care will drive it for years after the payments stop.

Getting out of a lease early can be very expensive, as there are steep penalties for early returns. And if you go over your allotted amount of miles during the lease, you will have to pay for the extra miles.

You may be able to get more car for your money with a lease, but that isn't always true. The economy has made leases more expensive, and loans are often relatively cheap.

There are other issues to consider. If you like having the latest model of a car, then leasing will give you that. Few of us are able to buy a new car every few years. You also have tax issues to keep in mine. If you lease a car and use it for business purposes, you can deduct depreciation as well as interest.

You may want to purchase a vehicle if you are rough on cars. Leased cars must be returned in top shape. You will pay extra fees if the car has more than normal wear. Insurance can be tricky on a leased vehicle. If the vehicle is totaled or stolen, your insurance may not cover what you owe. Gap coverage will cover any potential shortfalls of your insurance.

If you have poor credit, it may be more difficult to obtain a lease with reasonable terms. While credit will affect you with buying also, you should expect problems while attempting to negotiate a lease.

Leasing may appear very simple; you set up the terms, length and schedule of payments. But, looks can be deceiving. It is more confusing and mandates just as much negotiation as purchasing a vehicle.

The hidden numbers behind 0 percent financing

Nothing is better than free money, and that is what zero percent financing seems to be offering. But remember hearing that there is no such thing as a free lunch? Well, free money is even more suspicious. There are often strings and conditions that apply to all of these offers from manufacturers.

To qualify, you must have sparkling credit. There are plenty of other ways that zero percent loans can trip you up.

Most interest free financing offers require you to finance for three years or less. So if you do qualify, you will have to pay quite a large monthly payment.

For example, you are borrowing $20,000 for your new vehicle. With a three-year term at zero percent interest, you will pay more than $555 in monthly car payments. With a five-year term at 3.9%, your monthly payments will be $367.43, which can be better for you budget.

Some zero percent offers require that you make a down payment of at least 25%, where other finance deals could mean putting nothing down. It is a good idea to pay as much as you can down, so that it won't take you as long to build equity.

ABCs of auto insurance

Although there aren't set guidelines to what proper insurance coverage is, understanding how your policy works can help you prevent a financial nightmare when you need to make a claim.

There are six parts to the basic insurance policy. They include bodily injury, personal property liability, personal injury protection, comprehensive and uninsured motorist.

Bodily injury and personal property liability are the two major components of an insurance policy that involve liability coverage. These areas protect you against injuries caused to another person or property. All 50 sates and the District of Columbia require minimum liability insurance coverage. You can find out more information about your state by contacting the National Association of Insurance Commissioners. These requirements are listed as three numbers that define how much the policy will cover on an accident.

The amounts are listed by the thousand. California requires minimum liability coverage of 15/30/5. This means that the insurance will pay up to $15,000 for any individual injured in an accident, not to exceed $30,000 for all people injured and $5,000 is paid for property damage.

You should be aware that most state minimum will not provide sufficient coverage in the event of a serious accident.

You should carry liability coverage that is no less than 100/300/50. Then you will be able to provide $300,000 worth of injury coverage to all passengers, $100,000 to each individual and $50,000 for property damages.

If you have substantial assets that could be lost in a lawsuit, such as real property or financial portfolios, you should consider a supplemental liability policy. This give you added protection against any type of liability situation, whether in your car or at home. For $150 to $300 a year in premiums, you can have up to $1 million worth of protection.

Personal Injury Protection covers both medical expenses and lost wages for you and any passengers in your vehicle in an accident. People with good medical and disability policies may not need high PIP coverage. Instead, you should consider the lowest coverage allowed by state law. This will keep you from paying for unnecessary coverage.

Collision and Comprehensive coverages add significant costs to your premium. Collision provides coverage for losses or damages in any type of accident. Comprehensive coverage insures your car in the event of a theft or natural disaster.

If you have an older vehicle, the cost of repairing your car is most likely more than its value. In that case, you should waive both collision and comprehensive. The cost of the coverage will outweigh the payoff for you.

On newer cars, set a deductible on both your collision and comprehensive that is the highest amount that you can afford to pay for repairs. The higher the deductible, the lower the premium you will pay. Insurance professionals say that the majority of policies carry a $500 deductible on collision and comprehensive claims.

Uninsured motorists coverage protects you from accidents with motorists without insurance, and hit-and-run accidents. This coverage will also kick in when an at-fault driver doesn't have enough liability coverage to pay for the damages. Most states require this coverage by law