What to consider before buying your dream car

By Mike Aquino for Yahoo! Southeast Asia

Looking to buy your dream car? It’s not going to be easy, but you’ll get plenty of help along the way. Thanks to friends willing to give you their (sometimes unsolicited) advice and banks bending over backwards to provide affordable financing, the road to getting your dream car is not necessarily one you travel on alone.

Before getting started, though, you need to ask yourself some very tough questions, which might yield answers you may or may not want to hear.

“Can I afford my dream car?”

That sweet late-model automatic SUV may be calling your name, but being able to afford it is another story altogether.

First, if you’re going to purchase it with an auto loan, banks will only approve loans with maximum monthly mortgages calculated to 30% of your monthly income. So do the math before you approach the bank. If you subtract the down payment from the car’s price, add the total interest payment, and divide the sum by the number of months in the payment term, you’ll get an amount that should be less than thirty percent of your income.

If the calculated amount exceeds your monthly income, you have three options:
(1)    look for a better rate, or
(2)    increase the down payment (thus decreasing the amount to be financed by the car loan), or
(3)    aim lower—get a cheaper car.

Don’t forget to factor in the long-term costs of owning a car—these include (but are not limited to) registration, getting a license (if you don’t have one yet), auto insurance, maintenance costs, and fuel costs. These have no bearing on whether your loan will get approved, but they should be considered very carefully in the decision.

“How do I pay—cash, auto loan or in-house financing?”

While paying in cash is still the best option, only a very select few can pay for their dream car this way. So first, check with your bank. If you have a working relationship with a bank—say, you have an existing account with them—you might be able to negotiate favorable rates on an auto loan.

Even if you’ve never done any business with the bank you approach, they may still offer you competitive rates on an auto loan, especially if they have an ongoing promotion. Other banks may offer promotional freebies like a year’s car insurance or waived chattel fees to influence your consideration.

You can also take advantage of your car dealer’s in-house financing services. Assuming you have all your paperwork in order, going in-house can be far less complicated than approaching a bank for a loan, and dealerships will offer more freebies, like car accessories.
Interest rates for in-house financing are higher on average than bank rates, but some dealers will match the best auto loan rates you can get from your bank. Make sure you can get an official quote to show the dealer.

“Do I buy brand-new or second-hand?”

Your expensive dream car may not be entirely out of your reach, assuming you adjust your expectations. Look at used cars; due to the rapid depreciation of auto prices, you might get an excellent deal on a one-year-old car with very low mileage.

Before you buy used, though, you should check with your bank if they finance the purchase of second-hand cars. Most reputable banks do, albeit with strings attached.

They might charge a higher interest rate, say about 12 percent as opposed to eight percent for brand new cars. They might demand a higher down payment, up to fifty percent for older cars. And they may put limits on the age or make of the cars they’re willing to finance. (Two-year-old Toyota, yes; but pass on the eight-year-old Hyundai.)