Auto Loans Basics

Have you fallen for the latest and greatest that the auto world is offering? Does the sound of a car salesman jingling keys sound like wedding bells? If so, it's time to hit the brakes. While you may love your car, you must respect your wallet when it comes to purchasing that ton of metal that brings with it a ton of additional expenses. Here are a few things to consider before taking the plunge.

Affording the new car smell. Begin by taking the time to make sure you can afford a new (or used) car. Tally up the monthly expenses, including car payment, insurance, gas, maintenance, and a ballpark guess at repairs. Compare the final number with your monthly income. General wisdom says that a car payment shouldn't exceed 20 percent of your net income. (Hint: Select a longer loan term to make the payment affordable.)

Head to the lending highway. Once you know what you can afford, you'll need a lender. Your first stop should be at a credit union or bank. Auto dealer financing is also available, but they tend to have higher rates. If you've considered taking an auto loan from friends or family, be certain that you can make the monthly payment. Otherwise, you might be taking Uncle Bob for a ride.

Pick a loan option like you'd pick a car. Not only do you need to find a lender, you need to pick the right kind of auto loan, just like you need to find the right kind of car. Tax-deductible mortgages are a great option, from cash-out first mortgage refinancing to home equity loans. Auto loans also work if you're not a homeowner or don't have equity to tap. No matter what loan option you choose, good credit usually will land you a great rate.

If you're head over heels in love with a new set of wheels, try not to make an emotional purchase. Take a deep breath, and follow the tips above. Once they've steered you in the right direction, you and the car of your dreams should live happily ever after as you drive down the highway of life.