Thursday, March 24, 2011

Recent Grads: Wait on Buying that New Car

Make the right choice on your first car

This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide.


Graduating from college is such an exciting time. You're finally done with slaving over books and ready to slave over a cubicle desk instead. You won't have to rely on your parents for money anymore because you'll be making your own and you can finally upgrade to a better apartment, a brand new car and overall sweeter lifestyle.

Or so we all believe at first. Before you go about making plans for this new phase in your life, think about whether you can really afford it all. How substantial is that entry level salary really? How much debt have you accumulated over the past four (or more) years? Not to burst your bubble, but you might want to readjust your new spending plan, especially when it comes to financing anything--like your next car.

The True Cost of an Auto Loan

Let's say you've graduated and it's time to upgrade your ride. You have $10,000 set aside in your savings account specifically for this purpose, which is a pretty decent chunk of change. You could buy a nice pre-owned vehicle for that amount, or you could use it as a down payment on a loan for an even nicer new car. So which is the better option: Should you save your money and buy used or are there advantages to financing?

First, you have to consider that taking on an auto loan means you are going to be paying quite a bit more for the car than it's actually worth. For example, you use your $10,000 as a down payment and finance a $20,000 car. You are borrowing the additional $10,000--we can even assume you have good credit and get an interest rate of 6% APR--and your loan term is 48 months or 4 years.

That means your monthly payment will be about $235. This also means you're going to pay your lender a total of $21,280 for a $20k car. Is a slightly better vehicle worth shelling out an extra $1,280 for? Some people believe it is because it will help you build credit in the process. Well, that's true, but...

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