Whether you’re driving to a job interview or planning to bring your newborn home from the hospital, your car is usually along for the ride. Buying a car is one of the largest and most important purchases you might make during your lifetime. If you’re able to pay cash for a car, that’s great. But many rely on financing their car, which adds a lot of considerations beyond deciding on the vehicle itself.
To help determine the best financing option for you, ask yourself these nine questions first.
Read more: How Ally Bank's buckets and boosters can get you on the road to your next car.
1. Is it better to lease or buy a car?
Both buying and leasing a car have pros and cons. For example, buying a car means you own the vehicle when you’re finished paying, but leasing a car could put you in a newer vehicle for less money per month.
2. How much monthly payment can I afford?
Sit down with your budget and figure out how much you can realistically afford to pay on your car each month based on your income and expenses. A good rule of thumb is to go into the dealership intending to spend less but know your ceiling and stick to it no matter how good a higher-payment deal seems.
3. How long can I finance the car?
Auto financing term lengths vary based on factors like car model, age and more. Longer-term financing can mean lower monthly payments, but more money paid in interest or finance charges over the lifetime of the contract.
Refinancing your car to adjust your financing term
If you chose to finance the purchase of your vehicle, you may be able to refinance your financing term to one that’s shorter, longer or the same as your current one. Shortening a financing term may help you save on interest or finance charges while extending it can potentially lower your monthly payments, but you may end up paying more in finance charges.
4. How does financing a car fit with my overall debt goals?
Think about the goals you have to pay off debt, then list out potential factors such as:
Current interest rates on your existing loans
Upcoming purchases you plan to make in cash instead of paying for them with credit
Then consider what taking on auto financing will do to those goals:
Does the extra payment seem doable given your disposable income?
Does it slow down your progress and put a wrench in your plans?
If the latter, think about adjusting your objectives to make things work, with or without auto financing.
If you chose to finance the purchase of your vehicle, you may be able to refinance your financing term to one that’s shorter, longer or the same as your current one.
5. What are the maintenance costs?
If you’re looking at a high-end, luxury or performance automobile, it may require specific routine service to keep it working properly and maintain its resale value. If you’re going for a used, more affordable car, you should prepare yourself for repairs. In either case, add that number to the expected car payment to find out the total monthly cost of purchasing and maintaining the car.
6. What are current and expected interest rates like?
If interest rates are rising, you’ll want to be decisive so you can finance your purchase at the lowest possible rate. If they’re dropping or expected to drop soon, it can make sense to hold off on buying until you can take advantage of those lower rates.
7. Is my credit score important?
As with any type of financing, a good credit score typically qualifies you for better terms such as lower rates, while a below-average credit score ge[LY3] ts you less attractive terms
8. What down payment can I afford?
A down payment can make a big difference in the cost of the car loan overall. Determine how much money you have readily available that won’t deplete your emergency fund. Even a relatively small amount can increase your negotiating power at many dealerships because it results in cash in hand for the dealer, which is more attractive than the promise of future payments.
9. How does auto insurance impact the cost of financing?
Some banks and credit unions require you to carry full coverage insurance on a financed vehicle, which could raise your total monthly cost. Most states also require a minimum amount of auto insurance. (While you may be tempted to only purchase the policy size required by law, going bare bones could end up costing you.)
Make a plan
To help ensure your new car aligns with your budget and goals, write down a basic game plan before you visit a dealership that includes things like how much you want to spend, what kind of car you want and how much you’ll put down.
