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Question: What is the best strategy for financing a new car?
Answer: The Federal Reserve Board just cut interest rates to
banks by half a percent so this may be a very good time to
finance your car.
To compare vehicle loans, make a chart with the following
six columns: names and phone numbers of lenders; annual
percentage rate; 3 years; 4 years; 5 years; and total
interest charges for each loan. Call or check Web sites for
at least three places such as a credit union, bank, and
savings and loan association to fill in your columns.
Here is an example — Lender A will offer you a $15,000 loan
at 8.44 percent for 3 years (36 months), 4 years (48 months)
and 5 years (60 months).
The monthly payments for three-year loan would be $470 each
month and cost you an additional $1,913 in interest.
The monthly payments for the four-year loan would be $367
per month, and you would pay $2,603 in interest.
The monthly payment for the five-year loan would be $305 and
the total interest for this loan would be $3,310.
If you could find a 7.5 percent loan for three years, your
monthly payments would be $464. Your total interest would be
$1,693, saving you $220 which is a pretty good return on
your time spent comparison shopping.
Home equity loans may also be a good way to finance your
purchase. The primary advantage of using a home equity loan
is that you will be able to deduct the interest charges on
your tax return (if you itemize deductions). The major
disadvantages are that you are putting your home in jeopardy
if you can't make your car payments, and you will be charged
extra expenses such as a home appraisal, title insurance,
filing fees and an origination fee to establish a home
equity loan.
Dealerships may have special financing packages. Don't
hesitate to use this source of funding, but you want to be
prepared — do your homework before you sign the paperwork on
your new vehicle.
The best financial choice is the shortest loan with the
lowest interest rate. In our example, you could save $1,397
from a three-year loan compared to a five-year loan.
For more information, contact your local
Colorado State University Extension office.
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