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Car Loans - A Few Rules To Consider

Updated on August 31, 2014
1939 Armstrong Siddeley.  I love old cars like these.
1939 Armstrong Siddeley. I love old cars like these.

Car loan Basics

Not everyone can afford to pay for a car in full, so taking out a loan is one option. There are a few rules of thumb to follow that can help you to avoid getting too much into debt while allowing you to get a good car.

First of all, try to put 20 percent down on the car's cost. To not do this can result in an upside down loan which is not something you want. Basically, you will owe more on the car than it is even worse and that is a depressing thought. So to avoid that pitfall, put at least 20% down, if not more. The more you put down, the less you are paying for your car long term.

Try to finance the car for three years, or maybe four years. The less time you finance it for, the better off you will be. Again, you can quickly get into an upside down situation, very quickly, if you finance for too many years. You will just be paying more and more for something that is depreciating in value very quickly.

When considering what your monthly payments will be on your car loan, try to limit that amount to no more than 20 percent of your income for a given month. Don't try to make 20 percent any kind of goal, and make your goals for even less than that. By keeping this part low, you can have some "cushion" money for unforeseen potential problems that seem to invariably creep up in life! No one ever wakes up and expects to have a flat tire or get one during the day. No one ever plans on having an engine or belt problem with the car, but they do happen. If nothing else, consider that you will want some extra spending money to use on the things you enjoy in life. You don't want to be totally strapped or going into debt so you can enjoy the car you have.

These are the basic rules of thumb I followed when I got my very first car and others, and I was so happy I did. It is such an exciting thing to get a new car, and you want to be happy long term with your decisions.

Car Loans - A Poll

Have you ever had to get a car loan before, and if so, how many?

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    • oceansnsunsets profile image

      Paula 7 years ago from The Midwest, USA

      I agree about the upside down car loans, that would be terrible. Thanks so much, Rpalulis!

    • rpalulis profile image

      rpalulis 7 years ago from NY

      Great advice! Upside down situation with car loans are terrible, I agree to have the terms as short as you can, also if you decide to sell the car after it's paid off it should hold more value paid off sooner than later.