Financial Literacy: Car Loans

Whether you decide to purchase or lease a vehicle, you have to make sure the vehicle you are looking at is affordable for someone in your current position. According to an article published by Business Insider, “Many personal finance experts suggest the 20-4-10 rule. It means you should have a 20 percent down payment on a car loan, borrow for no more than four years and make sure car payments are no more than 10 percent of your gross income.” Revisit your budget and see what repayment plan will work best.

According to USA Today, the average price of a new car in August 2013 was $31,252 (though it’s important to remember that you don’t have to buy a new car). Your ability to pay for a car, new or used, outright as a fresh college graduate is unlikely, so it’s important to understand the way car loans work.

You have a few options for obtaining financing for a car: 

• Direct lending means a finance company, bank, or credit union loans you the money you need for the car and you agree to pay that money back with interest. 
• Dealership financing is the same thing, but you sign a contract with the dealer rather than a banking institution. With dealership financing, the interest rates will likely be a little higher. However, this option is often more convenient and more timely than applying for a loan through a banking institution.
• Another option is leasing a vehicle. Just like renting an apartment, you would be using the car for a time but you would not actually own it. When you lease a car, as opposed to buying a car, your payments will likely be less each month because you are only paying depreciation expenses, rent, taxes, and fees.