Chapter 2: What Can I Afford?

Figuring It Out

So how do you figure out how much owning a car will cost you? The answer can be found with research and a little guesswork. Fixed costs will be the same regardless of whether you drive just twice a week to pick up groceries or drive an hour to and from work every day. Flexible costs increase with the mileage and wear and tear on your car.

Fixed Fees

Downpayment

If you will take out a loan for a car, you'll pay a percentage of the car's cost up front as a downpayment. Finance companies usually require a downpayment because they like to see you put up some of your own money to demonstrate your commitment to the transaction.

Rebates, sometimes offered to consumers by car manufacturers, can help you make the downpayment if you don't have the cash. Rebates are usually well advertised.

Your Loan Payment

Once you determine the interest rate you'll pay for a loan, log the monthly loan payment and the total annual payment into the preceding chart. If you plan to finance options or extras such as electric windows, extra speakers, extended warranties and credit life insurance, add these to the loan payment. (Read about extras in Chapter 5.)

Banks and credit unions frequently offer the lowest rates on loans, but car manufacturers and finance companies offer loans, too. Car dealers may also offer to provide financing. Sometimes you'll pay car dealers extra interest for this one-stop shopping convenience. Other times dealers may knock down interest rates to pass along savings they've received from manufacturers who are trying to push certain makes and models.

How Do You Get a Loan?

Getting a loan is easy if you've taken care of your bank or checking account. You don't need a long credit history. Financial institutions will look at the following items when considering whether or not to grant a loan:

• A pattern of meeting financial obligations,

• More than one year at the same job, and

Tip

If you have your loan payments automatically deducted from your bank or checking account, you may be able to get a discounted interest rate. The automatic deduction cuts down on the lender's administration, so your lender may be willing to give you a break.

• No more than half of your gross income committed for fixed expenses such as rent, loans and credit cards.

Having all of these is not always necessary, according to bankers.

Credit Problems?

If you don't meet the above profile, you still may be able to get a loan. If you have a lot of cash on hand and have found a good deal on a car, you may be able to get a loan for the balance. But if you don't have much cash and you have a bad habit of bouncing checks or missing other bill payments, you'll need to discuss with your lender how to clear your record.

Establishing good credit can be as easy as paying your bills on time for six months. Lenders typically want to help you get a loan. Establish a relationship with a loan officer, and tap into his or her expertise.

Be wary of finance companies that offer loans to high-risk individuals who are considered "unbankable." You'll pay much higher than average interest rates at these institutions.

Questions to Ask About Your Loan

1. What's the percentage rate I'm paying?

Always look at the annual percentage rate. It may differ from the face rate of the note if you are buying and financing extras.

2. What's the grace period for my monthly payment?

3. Is there a late charge after 10 days? 30 days?

Length of Loan

Several years ago, loans were usually three years in length. But loans are now typically five years in length to spread out the higher cost of a vehicle over a longer period of time.

If you plan to buy a new car before you pay off your current car loan, you'll end up paying two car loans at once. To keep from incurring high debt, plan to keep a car until you've paid off the loan.

A Loan Turns You Upside Down

When you finance a new car or truck, you'll most likely be "upside down" for much of your typical five-year loan. That means a few years down the line you will probably owe more for the car than the car is worth. This is due to depreciation.

Knowing that you won't really own your new car until it's very used is an uncomfortable realization for some people. It's also one reason to consider buying a used car. Leasing is another option for those who don't care if they ever own a car and would rather drive a newer car all the time.

Repossession

When you take out a loan, the lender owns the car, not you. So if you lose your job, are hurt in an accident or otherwise can't make your loan payments, you risk having your car "repossessed" — taken back by the finance company. In that case, you won't recoup a penny of the payments you've already made. In addition, you may have to pay a "deficiency judgment" — the difference between what the finance company sells your car for and the loan amount. Because the finance company is only obligated to sell a repossessed car in a "commercially reasonable manner," it may auction the car off at less than its retail value.

For example, if you have $18,000 left to pay on your car when it's repossessed, and the finance company sells the car for $16,000, you have to pay the finance company $2,000. The $2,000 is the deficiency judgement. Adding insult to injury, you'll also have a poor credit rating as a result of not paying your loan, which means you'll have trouble buying a replacement vehicle.

Avoiding Repossession

To avoid the unpleasantness of repossession, call your lender immediately if you don't think you'll be able to make a loan payment within the grace period. In many cases, the lender will try to figure out a payment plan that you can stick to. But if you don't call right away, the lender may be less forgiving.

Repossession Can Happen Quickly

Finance companies normally aren't obligated to send letters warning you that your car may be repossessed. While they usually write first to inform you of a delinquent loan, they may have a right to repossess your car if your payment is even one day late following the grace period.


Used-Car Loans

Loans for used cars are similar to loans for new cars, except that lenders generally finance no more than 80 percent of a used car's value. This total value is based on the "National Automobile Dealers Association's (NADA) Used Car Guide" or "blue book." And typically you'll pay a higher interest rate on a loan for a used car than for a new one.

Insurance

Once you've narrowed down the car models you're considering, call several insurance agents to ask for insurance price quotes.

Insurance rates always vary based on age, sex, marital status, driving record, where you live, the number of miles you drive to and from work and the number of miles you drive annually, as well as your vehicle and its age and value. In short, if you're considered low risk, you'll pay less. If you're, say, a married couple with a teenage son at home, you're considered a high risk and will pay more than average.

Required Insurance

In Minnesota the minimum insurance you are required to carry includes:

• $30,000 per person and $60,000 per accident for bodily injury

This covers claims against you in addition to your legal defense if your car injures or kills someone.

• $10,000 property damage liability

This amount is paid for claims and defense costs if your car damages another person's property.

• $40,000 for personal injury protection

This covers your medical costs if you are in an accident.

• $25,000 per person and $50,000 per accident for uninsured/underinsured coverage

This pays the medical expenses of those in your vehicle in the event they are injured by an uninsured or underinsured motorist.

The following are also required by lenders for the duration of a car loan:

• Collision insurance

This pays for damage if your car is in an accident.

• Comprehensive physical damage insurance

This covers damage if your vehicle is stolen or damaged by fire, flood or another disaster.

Added Insurance to Consider

Pay for more insurance? Yes. You may want more than the minimum that's required, including:

• Medical payments insurance

This pays for medical expenses of the driver and passengers in your car who are injured in an accident.

• Towing

If your car stalls or is in an accident, towing is covered.

• Car rental insurance

When your car is being repaired, you can collect insurance to pay for a rental car.

License Fees and Tax

Call it a relief if you want: Here are two fees that are not negotiable! Sales tax in Minnesota is currently 6.5 percent (although some municipalities tack on an additional .5 percent). And the state has set licensing fees for the type and year of each vehicle. Call Minnesota Drivers License Information, (651) 296-6911, to check the license fees on a car you're considering buying.

Flexible Costs

Fixed costs are the same whether you travel 30 or 3,000 miles a month, but flexible costs are tied directly to your use of the vehicle. These are costs for gasoline, oil changes, car washes, protective maintenance, periodic repairs and depreciation.

The depreciation depends on the value of your car, which is influenced by its age and the number of miles you've put on it. You'll have to guess a bit on this cost. Determining other flexible expenses is easier, especially if you've already owned a car. If you've never owned a car, however, consult a book like "The Complete Car Cost Guide," published by The Intelligent Choice Information Company in San Jose, Calif., for guidelines.

Fill 'er Up

To figure how fast you'll empty your wallet by filling your tank with gasoline, first determine how many miles you drive per month. If you haven't owned a car, you'll have to make an educated guess. Then ask a dealer or consult a car book to determine the gas mileage of the car you're considering buying.

Example

1,000 miles ÷ 30 miles per gallon x $1.30 per gallon
Eight Ways to Lower Your Insurance Costs

The Insurance Information Institute in New York offers the following tips to reduce your insurance payments:

1. Comparison shop.

Shop for both fair prices and excellent service. Narrow the field by asking friends and relatives about their rates and checking the survey in the back of this guide for an estimate of rates.

2. Ask for higher deductibles.

Deductibles are the amount you pay out of pocket before your insurance company covers a claim. By increasing your deductible from $200 to $500, you could reduce your collision costs by 15 percent to 30 percent.

3. Drop collision and/or comprehensive coverage on older cars.

For cars worth less than $1,000, it may not be worthwhile to carry collision or comprehensive coverage. Your deductible may be equal to or more than the amount you pay for this coverage.

4. Eliminate duplicate medical coverage.

If you have health insurance already, you may be duplicating your coverage by paying for medical coverage on your auto policy.

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of gas. Rounded off, that's 33 x $1.30, which equals $42.90 per month. (Multiply by 12 for the yearly gas expense. In this example, you would pay $514.80 for gasoline for the year.)

Tires, Maintenance and Repairs

Finally, figure in the expenses of buying new tires every few years and paying for general maintenance every year. Maintenance may be as simple and inexpensive as quarterly oil, fluid and filter changes for the first few years you own a new car. If you plan to buy a used car, you'll want to set aside more money for maintenance and repairs.

An Appreciation for Depreciation

While not an out-of-pocket cost, depreciation is the biggest expense you'll have on an automobile, especially a brand-new one. Depreciation makes up more than half the cost of owning and operating a new vehicle.

A new car can lose between several hundred and several thousand dollars in value the minute you drive off the dealer's lot. About 20 percent of depreciation costs occur within the first year. Even so, you really won't feel the sting of depreciation unless you decide to sell your car soon after you buy it.

It's impossible to know exactly how much a car will depreciate because so much of its value is wrapped up in its popularity. But the "blue book" will give you an idea, as long as this isn't the first year the model has been sold. Look up previous years' models to see how they've held their value.

Resale Considerations

Continued from Previous Page
5. Buy a low-profile car.

Cars with high incidences of collision or theft, or those that are associated with a high rate of injury, may cost more to insure than those considered safer or less sought after by thieves. The Insurance Institute for Highway Safety can send you a report comparing more than 100 cars' rates of collision, injury and theft. To order a report, mail a self-addressed, stamped business-sized envelope to: HLDI, P.O. Box 1420, Arlington, VA 22210, and request the "Highway Loss Data Chart."

6. Take advantage of low-mileage discounts.

Some insurers offer discounts to motorists who drive less than a predetermined number of miles per year.

7. Find out about automatic seat belt or air-bag discounts.

You may receive a discount for having these safety devices.

8. Ask about other discounts.

Other possible discounts may be given for owning more than one car, having no accidents in three years, being more than 50 years old, taking driver training courses, installing anti-theft devices, having anti-lock brakes, being a nonsmoker and even being a good student.

From the Insurance Information Institute, New York, NY. For more information call 1-800-942-4242.
Tips for Better Resale Value:

• Avoid offbeat or less well-known makes and models. Remember the Pacer? The Gremlin? The Fiero? Where-oh-where are these today? Select a popular, highly regarded model or a car from a respected auto maker that will virtually be guaranteed to be well-regarded years down the road.

• Choose a car from an auto maker that doesn't change its body style every year or so. If you're bent on buying a fashion-forward style, buy it soon after it's first marketed.

• Even in Minnesota, a good air conditioner is a must for raising resale value. A high-quality sound system also heightens the value.

Chapter 3: Hit the Books Before the Accelerator
Countless car-buying guides describe makes and models, covering everything from cylinders to seat comfort. How much do you really need to know about cars before you buy one? You don't have to be a car genius to buy a car you'll be happy with. Just do some soul-searching and some simple research first.