Figure Out How Much Car You Can Afford

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In the market for a car?
Even before deciding what make, model and color, you'll need to figure out how you're going to finance the vehicle.

The first step is to figure out how much you can afford to spend on monthly payments.

The second is to figure out exactly how much car that can get you.

But before you decide to buy a Porsche, keep this in mind: The longer your loan, the more expensive it's going to be.

Not only will you be paying interest for a longer term, but your interest rate is likely to be higher.

Five years down the road, you may wish you had those extra interest payments to pay for a new car.

Consider an example:

You can afford $400 a month in financing charges. Your financial institution offers different rates depending on the length of the loan. My own credit union -- Bank Fund Staff Federal -- charges interest at 3.75% on a 36-month loan and 5.75% on a 60-month loan.

The 36-month loan will get you about $13,600 worth of car.

The 60-month loan will get you about $20,800 worth of car.

That's approximately the difference between the suggested starting price of a 2008 Honda Fit and an Accord Sedan.

But the luxury will cost you. Over time, you'll be making payments for two extra years, and over the life of the loan you'll have paid $2,400 more in interest.

If the $2,400 doesn't seem like much for the extra comfort, it's probably worth buying the Accord.

But another option is to stretch your monthly budget and pay the Accord loan over three years. You'll be paying $212 more a month, but you'll save yourself two years of payments and almost $2,000 in loan payments.

Want to explore other auto loan scenarios? Check out BankingMyWay's auto loan calculator.

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