You may have just begun your search for new wheels, or perhaps you’re trying to decide between buying new or used. The purpose of this post is to help you quickly understand the range of possibilities for your particular budget.
The graphic above displays the number of potential new-car model choices by monthly payment and type. Below, late-model used cars (3 years old) are shown for comparison. The significant shift in the quantity and variety between new and used models for a given payment—$350/month for example—is due to the rapid depreciation (loss of value) of a new car. A three-year old car is typically worth only about 55 percent of it’s original value.
The monthly payments in the graphics above all assume a typical 4 percent interest rate. However, auto loan interest rates can range significantly based on your credit score. As your credit score improves (higher), your purchasing power goes up. The table below, a July 2016 credit union rate sheet, demonstrates the relationship between credit score and new-car interest rates. According to the table, the interest rate essentially doubles at a score of less than 660, typically referred to as subprime.
Based on the table above, interest rate also increases somewhat as loan duration increases. However, a longer loan duration has a much greater effect on the amount financed (and total spending) for a given loan payment.
The graphic below shows the purchasing power of a $350 monthly payment as loan duration ranges from 36 months to 84 months. For example, you can finance the purchase of a 2016 Toyota Rav4 instead of a 2016 Hyundai Elantra simply by increasing the loan duration from 48 months to 72 months and adding an additional $700 to your down payment. However, extending the loan duration also drives up drives up spending—in this case, by more than $8,500 (including the additional down payment and interest).
Of course, the best way to get more car for your loan payment is to obtain a better price. The purchase price of a new car, for example, may actually vary by as much as 20 percent for the exact same model and trim!
If you’re buying a new car, the most effective way to drive down prices is to ensure that there’s robust competition for your purchase. Everything you need to enhance competition, and vastly improve your next new-car purchase has been included in my new eBook—The 15-Minute Guide to Negotiation Free New-Car Buying: Simply Save More and Stress Less. The good news is that you can get the benefit of competition without the typical back and forth hassle! Take a look at the free preview for more info.
Have you just begun the car buying process? Or, are you about to make your final decision? Plan to buy new or used? Have you selected the make and model? I’d love to know about your journey and how I can help. Comment below and the entire carswithease.com community will benefit!
Toyota Rav4 Photo
By Kickaffe (Mario von Berg) – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=47124810