In a car buying world where traditional brick and mortar dealerships have ruled the landscape for decades, millions of car buying Americans have been disenchanted with the old way to buy a car as they haggle with a salesperson when looking to buy their next car. Certainly, the largely unchanged process of buying a car from a dealership has contributed to the negative feelings towards the traditional way to purchase a vehicle. However, it’s true that the customer themselves can often times contribute to the unsavory experience by entering the market ill-prepared and lacking understanding as it pertains to their own credit or financial situation.
Below, we outline a few basic tips to help you reduce the risk of digging yourself into a financial hole with your next vehicle purchase.
How much should I spend on a vehicle based on my income?
The idea behind responsible spending is one that sounds simple enough in theory, but can be much more difficult to execute. Especially if you’re all *heart eyes* emoji with that car you’re scoping out. However, a well thought out plan and a little discipline can serve you well in the long run. A common rule of thumb when deciding how much you should spend on a car based on your current income is the 20/4/10 rule. According to interest.com, the 20/4/10 rule says you should:
- Make a down payment that’s at least 20 percent of the final sale price of the vehicle
- Finance a car for no more than four years
- Don’t let your total monthly vehicle expense – including principal, interest, and insurance – exceed 10 percent of your gross income
There are other approaches out there when it comes to determining how much you should pay for a vehicle, but the 20/4/10 rule is the most tried and true.
What is APR?
APR stands for Annual Percentage Rate. In essence, it tells you how much money you’ll pay on money you borrow. As TheBalance.com says, “Think of the APR as the “price” of borrowing, quoted in terms of an interest rate.” For example, if you borrow $100 at 10 percent APR, you can expect to pay $10 in interest over the course of one year.
What affects my interest rate on a car loan?
A person’s credit score can majorly impact the interest rate on a loan you take out to pay for a vehicle. Essentially, your credit score informs lenders how much risk they are taking on by lending money to you, so generally the lower your credit score, the higher your interest rate. Another factor is the length of the loan term. Generally speaking, shorter loan terms offer lower interest rates, as lenders get their money back quicker. The downside, however, is that a shorter loan term may mean a higher monthly payment. Age of the vehicle and money down also plays a role. You can get a lower rate by purchasing newer vehicles and putting down a sizeable down payment.
While these are just a few basic items of note, equipping yourself with this knowledge can go a long way towards alleviating stress and anxiety associated with the act of buying a car. At Carvana, our goal at the end of the day is to help you avoid these financial pitfalls and quagmires by providing tools and resources that enable you to approach car buying with a clear focus and plan. Whether you choose to buy online with us, or somewhere else.