before you buy a car
How Car Financing Affects Your Choices
Like your budget, financing is another factor that affects your car purchase. You might even want to look for a loan before going car shopping, because loan terms, like rate of interest and length of financing, have an impact on how much you can afford to pay for a car. Which of these is true?
- The higher the interest rate, the less you can afford to borrow.
- The lower the interest rate, the less you can afford borrow.
- The interest rate doesn't affect the amount you can borrow.
"A" is correct. Say your budget shows you're able to pay $375 on a car loan each month. If the loan has an interest rate of 3%, you can afford to borrow up to $21,870 to finance the car, document fees and taxes. With an interest rate of 5%, you can only afford to borrow up to $20,872.