Price the ownership
The sticker is the entry fee, and what you are really agreeing to is a monthly cost of ownership. Write it out first. For a car, add the loan payment, insurance, fuel, registration, and maintenance and repairs, which commonly average about a hundred dollars a month over a vehicle's life. For a home, add the mortgage payment, property tax, homeowner's insurance, any association dues, mortgage insurance if your down payment is under twenty percent, and upkeep, which a standing rule of thumb puts at one percent of the home's value each year. Get an insurance quote on the specific model or address before you commit.
Two old ceilings
For a car, the 20/4/10 rule says to put twenty percent down, finance for no more than four years, and keep all car costs under ten percent of gross income. For a home, the 28/36 rule says housing should take no more than twenty-eight percent of gross monthly income and all debt payments together no more than thirty-six. On a $60,000 salary that works out to $500 a month for everything the car costs, $1,400 for housing, and $1,800 for all debts combined. A lender will often approve more. An approval measures what the lender can tolerate and not what you can.
What the loan term hides
Borrow $30,000 at seven percent and compare. Over forty-eight months the payment is about $718 and the interest totals about $4,500. Over seventy-two months the payment falls to $511 and the interest climbs to about $6,800, and for most of those six years you owe more than the car is worth. Stretching the term is how an expensive car is made to look affordable.
At the table
- Arrange a loan preapproval from your own bank or credit union first, so the seller's financing has a rate to beat.
- Negotiate the total out-the-door price before you discuss any monthly payment.
- Budget for the cash due at the start, which for a home means closing costs of roughly two to five percent of the loan, and for a car means sales tax, title and registration.
- Decline the extended warranties and protection packages offered at signing, since nearly all can be bought later.
- Go home and sleep on it, because a deal that expires tonight is rarely a deal.
Tip Pay for an independent inspection before you buy any used car or any house. A mechanic charges a hundred dollars or two and a home inspector several hundred, and either report can save thousands or reopen the price.
