Financing your new or used car has never been easier. Here are the top five mistakes to avoid to prevent excessive credit card debt caused by buying too much car.

Not Knowing How Much Car You Can Really Afford

Financial experts recommend spending no more 12 to 15% of your after-tax monthly income for car payments. To calculate how much car you can afford, multiply your monthly net pay (take-home pay after taxes are deducted) times 15% (.15). Your car payment should not exceed this general guideline. There's more to the cost of a car than just the purchase price - there's the cost of owning your new car. Insurance rates vary widely depending on theft, damage or repair costs for each make and model, as well as other factors, so ask your insurance agent for quotes on several different makes and models. Also consider the costs of repairs and maintenance and the repair record of the car, available from Consumer Reports and other consumer organizations.

Buying New Versus Used Cars
New cars depreciate in value signficantly during the first two years of ownership (30 to 40%). If money is an issue, let someone else pay for the depreciation on the first year or two of your car - buy used. If you're very concerned about warranties or determined to have particular options and specific features, and the rapid loss of value in the first few years of ownership is not a big concern (for example, if you intend to keep the car for 5 to 7 years), buying new may suit you, but go into it with your eyes open.

Not Knowing the True Worth of a Rebate Versus a Low Interest Rate on New Cars


What if your dealer offers a choice between a cash rebate on your new car or a very low interest rate? How do you determine which is the best deal? You may be surprised, so use the quick and easy Rebate/Interest Rate Calculator on Bankrate.com to find out you which deal will save you the most money.

Choosing a Long-term Loan Versus a Short-term Loan

There was a time when the average car loan was 36 months. Now 60 months is more the standard and many dealers are offering 72 months or more. This allows you to buy more car than you can really afford, by stretching the payments out until the car is almost fully depreciated. You also end up with higher interest costs, and you may become upside down on your loan. Try to buy only as much car as you can afford to pay off in 48 months, or even better, 36 months.


Being Upside Down on Your Existing Car Loan

Long-term loans (and quickly depreciating cars) are also the reason people get "upside down" on their loan, where they owe more than the car is worth. If they trade it in or sell it, they have to pay the lender money out of their own pockets or add the old loan balance to their new car payment. Rather than stretch your payments out over five years or more, buy a cheaper car, or a one- or two-year-old car, and pay it off over a shorter period.