If your debt-to-income is running too close to 50%, you’re
going to have a hard time getting a loan for anything. Make sense? The way the bank looks at it is like this: you can’t afford both cars so they assume that you are going to let the other (older) car go back to the lender=repossession. That’s their take. Debt-to-income is a HUGE deal.
In this case, your disposable leftover income is $990.00. 20% of your gross ($5300.00) would be $1060.00. Whoa! Let me be the first to inform you that you are NOT getting a car payment of $1060.00! Why? Well, you only have $990.00 left over for starters. Let’s be realistic here.
Most lenders will slice that in half which will equal $495.00. Your payment call should be around that figure, give or take a few dollars.
How expensive of a car can you buy on a $495.00 payment? Good question and one that you absolutely need to know so that you can pick out the correct car. One answer depends on the term of the loan. You can
finance for 36, 48, 60 or 72 months, as a for-instance. That equates to 3 years, 4 years, 5 years and 6 years.
I will tell you this: the worst thing you can do is extend the note out the longest amount of time in
order to get the payment where you can afford it. That creates a syndrome that now affects over 75% of car owners called being “Upside Down.” It means that you owe more on your car than it’s worth. It also means that you need more money down when you go to trade it in. The only way around that is a lot of money down or a short-term loan. If you will buy what you can afford and finance for the shortest term possible, you will be in a much better position to trade sooner.
You can again do a Google search for a ‘car loan calculator’. You will then punch in the loan amount you want to borrow, the term (48,60, etc.) and the interest rate. If you have not gotten approved already and know
what your interest rate is, you will have to guesstimate.
Here’s a rule of thumb for you-it’s not an exact science without knowing your credit, but it is a guide you can follow to get you close.
Let’s base the rate on your beacon score: that’s what the lenders are going to look at.
If your beacon (credit score) is in the 400 or lower range, you will need to figure your interest rate on a new car at 21% (state maximums differ-it could be 18%). If you are looking at a used car, figure on 33%.
If your beacon score is in the low 500 range, figure your new car loan as you would for the above-mentioned 400 beacon.
If your beacon score is in the mid to high 500-range, figure a new car at 18% and a used car at 27%.
If you have a beacon of 600 to 649, figure a new car
at 16% and a used car at 20%.
If you have a beacon score of 650 to 699, figure a new car rate at 12% and a used car rate at 16%. I may be
hitting too high on a few of these, but I live in a state that has the highest rates in the nation. Better safe than sorry.
With the car loan calculator, you will basically be backing into the payment. Punch in an amount that you believe you will be financing and then adjust to get it to the payment of $495.00.
In my next article, I will take you by the hand and personally walk you through the steps to get pre-approved online and get the check, negotiating, how to narrow down your three cars in a hurry, what NOT to
say or do at the dealership, what to demand before you sign and what to expect once you go into the finance office to sign.
