A Guide to Loans, Credit, & Setting a Budget for a Used Car

The Do's & Don'ts of Financing a used car ...

Loans, Credit, & Setting a Budget for a Used Car

When you have made the decision to purchase a used vehicle, the excitement and anxiety can often lead to premature decisions about finances that can lead to disaster. Before choosing a vehicle, prospective owners should set a firm preliminary budget and not overextend their financial boundaries. In order to set limits, you must educate yourself about loans, credit, and debt-to-income ratio.

A bank or lender can grant qualification for a loan, but this only means that they have determined that the you simply have the financial means to pay it back.

This decision is based either on a credit report, or is calculated based on the debt-to-income ratio. The first option represents what you are willing to pay, while the latter is a more reasonable estimate of what you are actually able to pay.

You can acquire a copy of your credit report through one of the national agencies such as Equifax.com if your debts are with large lenders. For those owing to smaller creditors, a request to more than one of these agencies is suggested. Check the reports for any inaccuracies and then find out what you can do to essentially clean up your poor credit rating if you have one. (You will receive more information on credit and scores in section two "The Importance of your Credit Report and Credit Score")

As mentioned previously, credit reports are only one method of assessing a car buyer. Debt-to-income calculates a budget by adding up monthly installments for auto and credit card payments, and dividing the total by the individual's net pay. This does not always show an accurate picture of what an individual can actually afford because it does not take into account other necessary expenses such as mortgage payments, utility bills, groceries, insurance, gas and other living expenses.

In order to make a financially sound decision when setting a budget for the purchase of a new vehicle, take an honest look at everything. Total up all monthly living expenses, excepting loans and credit cards. Then add every annual expense such as retirement plans, car insurance, and other yearly fees and divide this total by twelve. When the two numbers are totaled and then added to the individual's monthly credit expenses, the overall total can be subtracted from the monthly net income to determine the amount of money the new car buyer can comfortably manage.

Consumers who are able to pay cash for a new vehicle will save money by avoiding financing altogether and calling on funds that may come from savings accounts and other securities. However, it is advised that these buyers use caution when assessing their situation so that they have enough of a cushion should finances fall short in the future.

Research and analyze as much information as possible before committing to a financial plan and a purchasing specific vehicle. Lending institutions often do not take the full range of expenses into account, and it is up to the consumer in the end to make a responsible and manageable financial decision. Effectively utilizing online financial resources can help tremendously in this process. The following list of financial web sites can help you with all your credit needs:


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