Financing your new or used vehicle purchase? It's wise to establish how much you can afford to pay per month-before you start shopping. This will help dictate the price range of the cars to consider. But don't lose sight of the total price while attempting to keep the monthly payments low.

Shopping For Your Loan Can Save Plenty of Dollars.
Even though cars are more affordable than they used to be, prices are still high. In 2004, the average new vehicle sold for $28,050, according to the National Automobile Dealers Association (NADA), and the average used vehicle at franchised dealerships cost nearly half that much.

Cars sold between individuals and by independent used-car lots tend to be cheaper. The National Independent Automobile Dealers Association (NIADA), which represents dealers who specialize in used cars, found that the average vehicle retailed for $7,632.

Negotiating a good price on a car is just the beginning. Shop for financing (and insurance) with the same dedication and you can save plenty-provided that you qualify for some of the tempting low rates that can be found. If your credit record is impaired, you're likely to wind up paying a higher rate than you might have hoped.

Remember, the interest you pay will reflect the risk that the dealer-or more likely, the financial institution that actually makes the loan-is taking. Only the best credit risks qualify for the zero-percent or low-rate financing that's advertised on TV, offered by a manufacturer's financing arm. For buyers with less stellar credit, annual percentage rates can reach 20 percent, especially for used cars, and the Better Business Bureau hears of figures far higher.

Remember that most banks will require at least 20 to 25 percent down on a new- or used-car loan. Most likely, they will have a maximum amount (called Loan Value or Finance Value) that they'll let you borrow for a certain year and model of car. Finance Value is typically about 25 percent less than the normal retail value of the car, so this is a helpful way to tell if the seller is asking a reasonable price.

In 2004, the average new-car interest rate at finance companies increased to 5 percent, according to the NADA--a result ofstrong incentives late in the year. Banks charged an average of 6.6 percent.

Bankrate.com reported at the end of 2004 that the average new-vehicle rate was 5.9 percent for a 3-year loan and 6.25 percent for a 5-year term. Three-year loans on a used vehicle averaged 6.9 percent.

Many, if not most, people who don't qualify for the super-low rates can get a better deal by avoiding any dealer's financing and obtaining a loan through a bank or credit union (though most lenders have been easing away from risky loans). And remember, when buying from a private party, you have to arrange your own financing.

Prime and Subprime Financing
The best interest rates go to the customer with a steady job, permanent address, and good credit history. If your credit rating is poor, a new car is probably out of the question and a used-car dealer who specializes in high-risk financing may be your only choice. This may also be your only recourse if you haven't used credit much, and therefore have a minimal payment history.

If you are in this situation, what you want to avoid is going "upside down," which means you owe more on your car than it's worth.

Buy Here-Pay Here financing is a growing trend, especially for lower-priced used cars. Dealers may even have a separate lot for them. It's a convenience for low-income shoppers, but almost certain to be accompanied by a high interest rate. For shoppers who must have transportation but lack good credit, this could be the only choice.

Quite a few dealers and their financial agents offer subprime (sometimes called nonprime) financing, having sensed the profit to be made. Still, many other dealers are reluctant to extend any credit to risky customers-a category that's ever-expanding as layoffs and cutbacks continue to assault the workforce.

This is a period of "risky endeavors," said Peter Brandow, CEO of Brandow Companies, speaking at the 8th Annual Non-Prime Automotive Finance Conference. Dealers are seeing "desperate people in our stores," Brandow said.

High-risk buyers generally must come up with a higher down payment, too, so the dealer is assured of getting part of his investment. In fact, the down payment on a lower-end used vehicle might cover the full amount the dealer has in the car; any payments beyond that point could be sheer profit.

Subprime has been growing due to sizable increases in the number of personal bankruptcies, and a growing number of consumers with troubled credit. Lenders are seeing fewer "prime" shoppers these days. Late payments, delinquencies and repossessions increased in 2003, according to a survey of non-prime lenders.

A few years ago, subprime lenders loosened their standards somewhat, in an attempt to write more automobile loans. Then, when the economy began to falter, they found themselves holding a lot of loan contracts that weren't being paid. As a result, credit is tighter now, which means credit-challenged shoppers will have a harder time than ever finding a reasonable interest rate-assuming they can get a loan at all on a vehicle.

In 2003-2004, allegations surfaced claiming that dealers were pocketing unconscionable sums for arranging loans for their customers. Financial institutions commonly pay dealers a percentage of the total amount financed, or a flat fee per loan. Dealers then charge a "markup" over the car's selling price to their customers, which can amount to thousands of dollars.

Courts have not yet determined the overall legality of theses charges. The National Automobile Dealers Association encourages its member to disclose the fact that interest rates are negotiable, and state that a dealership may profit from a loan markup.

What's Your Credit Score?
Even if you make financing arrangements at a dealership, that doesn't mean the dealer will hang onto that agreement. New-car dealers may use a manufacturer's captive finance company. Used-car dealers typically sell your "paper" to a separate financial institution. Some financial organizations specialize in higher-risk loans. Others won't take "paper" from an applicant with a low credit score.

In 2003, according to the National Independent Automobile Dealers Association, less than 20 percent of used-car sales by independent dealers ranked as "A" paper, worthy of low interest rates. More than 36 percent were "C" paper, and nearly 24 percent were rated a high-interest "D."

Dealers and other retailers rely firmly on those credit scores, which are calculated by organizations that specialize in keeping track of credit applicants. The best known is Fair Isaac Corp., a California firm that rates individual credit reports to produce a FICO score that ranges between 300 and 850 points. The higher your credit score, the lower the financing rate you're likely to be offered. Most people fall into the 600-800 range, but if your score is on the low end of the scale, you'll be lucky to get an offer at all. And when you do, it's certain to be for a high interest rate.

Credit scores make use of information from credit reports to predict a person's likelihood to pay his or her bills on time. Many factors are considered, including any record of delinquencies, defaults, or bankruptcy. Self-employed people are suspect, for example, because their income is difficult to verify. First-time buyers are in a difficult position because their record is likely to be minimal. Bankrate.com can tell you how to obtain your own credit score, and provides additional information on automobile financing.

Let's hope you don't find any of these items on your credit report at some point:

Charge-off: a portion of a debt that the lender determines will never be paid.
Default: a statement on a credit report that the individual has not paid a debt, which usually results from a series of delinquencies.
Delinquency: failure to make a payment on time, typically stated in the number of days it's behind (30, 60, etc.).
Judgment: a legal decision stating an amount that a person must pay to cover a debt.
Repossession: confiscation of a vehicle by or for the lender, after a pattern of delinquencies suggests that further payment will not be made.

Before You Sign. . .
The Better Business Bureau has warned of companies that offer advance-fee loans, targeting shoppers with credit problems. You have to pay a fee before a loan is obtained. All too often, a loan is never granted, and the company disappears. Steer clear of any loans where you pay the interest up front. After several years of paying, you could still owe the entire principal of your loan.

Avoid any lender that tacks processing fees or other extra charges onto the basic loan. Inspect all finance agreements carefully. Understand every figure, and make certain all calculations are correct. If figures don't come easily to you, bring along a friend to examine all documents.

Here's what to look for on the form:

Sale price: the amount you've agreed to pay for the vehicle.
Down payment: the amount you've agreed to pay before taking delivery. The higher the down payment, the lower the loan amount and payments.
Trade-in value: the amount the dealer is giving you for your old car. This could cover most or all of the down payment. Trade-ins leave plenty of room for tricky maneuvers, so be sure you know exactly how much you're getting.
Loan amount: the number of dollars you're borrowing to make the purchase.
Annual Percentage Rate (APR): the percentage of the borrowed amount charged as interest each year. Unless you can qualify for a single-digit rate, you'll be paying plenty of interest. If the rate exceeds 15 percent or so, think twice before signing.
Monthly payment: the amount you'll have to come up with each month. Know exactly how and when each payment must be made.
Payment period: the number of months you'll be making those seemingly endless payments.
Total car cost: the sum of the monthly payments (including interest) and the down payment. This is how much the car will actually cost you, and it can be dramatically higher than the sale price alone.

Short-Term Loans Cost Less
The longer the loan period, the lower the monthly payments-but the more you'll end up paying for the car in the long run. Ordinarily, however, longer loans demand higher interest rates, but there are exceptions.

Periods longer than 3-4 years used to be hard to find without paying an exorbitant interest rate, and were likely to be available only for more expensive vehicles. In recent yeas, though, there's been a trend toward long-term loans for new vehicles: 72-month and even 84-month. The average new-automobile loan period at finance companies was 61.4 months in 2003.

Monthly payments and total amount paid for a $7500 loan at 6.9 percent annual percentage rate (APR), for various loan periods:

No. of Months	Monthly Payments	Total Payments	Portion that is Interest
12	$661.11	$7933.32	$433.32
18	452.16	8138.88	638.88
24	347.82	8347.68	847.68
30	285.33	8559.90	2059.90
36	243.77	8775.72	1275.72
42	214.16	8993.92	1493.92
48	192.03	9217.34	1717.34
54	174.87	9422.98	1942.98
60	161.20	9672.00	2172.00

What Counts is the Total You Pay
The price of your used car includes more than the figure you settle upon with the seller. The true cost is the amount you will have paid over the life of the loan taken to finance the car. That total depends upon the size of your down payment (including trade-in value), the interest rate, and the number of months taken to pay off the loan. Try to make the largest down payment you can afford, and shop for the lowest interest rate. Unscrupulous dealers or finance companies have charged 50 percent. In the example below, a loan at that rate means you'd be paying about as much for financing as for the car itself. Double-check the contract to make sure you know the rate you're agreeing to pay.

Monthly payments and total amount paid for a $7500 loan at various interest rates (APR), for a 36-month loan period:

Interest Rate	Monthly Payment	Total Owed	Portion that is Interest
8.9%	$238.15	$8573.40	$1073.40
9.9%	241.64	8699.40	1199.40
11.0%	245.54	8839.44	1339.44
12.5%	250.9	9032.40	1532.40
14.0%	256.33	9227.88	1727.88
16.0%	263.68	9492.48	1992.48
18.0%	271.14	9761.04	2261.04
20.0%	278.73	10,034.28	22534.28
25.0%	298.20	10,735.20	3235.20
30.0%	318.39	11,462.04	3962.04

Loan Repayment Schedule
This amortization table can help you determine monthly payments on a given loan amount. If, for instance, you plan to borrow $5000 at 7 percent interest for three years, multiply $30.88 (the monthly payment for each $1000 of loan amount on a 3-year loan) by five ($5000 total). Your monthly payment on that $5000 loan would therefore be $154.40.

Remember, you'd probably need to have at least $1250 (25 percent of the loan amount) as a down payment. The total of your down payment and your loan will have to cover the cost of the car as well as any applicable sales tax and fees.

Monthly payment per $1000 of loan value:

Interest Rate	2-year	3-year	4-year	5-year
0%	$41.67	$27.78	$20.83	$16.67
1%	42.10	28.21	21.26	17.09
2%	42.54	28.64	21.70	17.53
3%	42.98	29.08	22.13	17.97
4%	43.42	29.52	22.58	18.42
5%	43.87	29.97	32.03	18.87
6%	44.32	30.42	23.49	19.33
7%	44.77	30.88	23.95	19.80
8%	45.23	31.34	24.41	20.28
9%	45.68	31.80	24.89	20.76
10%	46.15	32.27	25.37	21.25
11%	46.61	32.74	25.85	21.75