Finance and Insurance

Buying a car involves more than simply picking out what make and model you want, and the cost of the car involves more than just the sticker price. Monthly payments--including interest--and the price of insuring the vehicle must be considered as part of the cost of owning a car. Consumer Guide has put together a comprehensive list of information on both topics to help guide you through insuring and financing your vehicle.

Types of Insurance Coverage

What is your car insurance actually insuring? Although you're buying a single insurance policy covering a specific vehicle, a number of components make up the final cost:

* Bodily injury liability: Covers injury and death claims against you, and legal costs, if your car injures or kills someone.
* Property damage liability: Covers claims for property that your car damages in an accident. Because liability coverage protects the other party, it is required in all but three states.
* Medical payments: Pays for injuries to yourself and to occupants of your car. This is optional in some states. In "no-fault" states, personal injury protection replaces medical payments as part of the basic coverage.
* Uninsured motorist protection: Covers injuries caused to you or the occupants of your car by uninsured or hit-and-run drivers. "Under-insured" coverage also is available, to cover claims you may make against a driver who has inadequate insurance.
* Collision coverage: Covers damage to your car up to its book value. Collision coverage carries a deductible, which is the amount per claim you have to pay before the insurance takes effect. The lower the deductible, the higher the premium. While it is legally optional, a lending institution or leasing company usually requires collision coverage.
* Comprehensive (physical damage): Covers damage to your car from theft, vandalism, fire, wind, flood, and other non-accident causes. Comprehensive also carries a deductible.

Why Some Cars Cost More To Insure

You might want a sports car or a fancy SUV, but your insurance company may charge you more to protect you while driving it.

Insurance premiums are based partly on the price of the vehicle, which affects the replacement cost if it is stolen or "totaled" in an accident. How expensive the vehicle is to repair--including parts and labor--can also affect the cost. In addition, surcharges may apply to vehicles that are frequently stolen or involved in accidents.

Who You Are and Where You Live

Factors that you can least control may have the greatest impact on your insurance costs. Your age, gender, and driving record are key factors that affect your insurance premium.

Single males under the age of 25 pay the highest rates. Statistics show they are involved in the most accidents, so insurance companies charge young men higher premiums than women of the same age.

If you are convicted of moving traffic violations or of causing an accident, your premiums will likely go up, no matter what your age. Drivers with clean records--no tickets, no accidents--pay the lowest rates.

Where you live also plays a big role in how much you pay. Urban areas, with their greater population densities and heavier traffic, get higher rates than rural areas.

In most states, too, insurers set rates by zip codes. If you live in a major city like Chicago or Los Angeles, you will probably pay more than if you lived in a nearby suburb.

How Much Do You Need?

While it is dangerous to be underinsured, having too much insurance can be an expensive mistake as well. The minimum amount of insurance required in your state is seldom enough.

State law may require as little liability coverage as $15,000 per person, $30,000 per accident, and $5000 property damage. If you can afford it, buy more than the minimum.

Like buying a car, there is no single best solution when it comes to buying insurance. Rates vary widely. Shop for insurance by consulting two or three of the largest insurers.

Don't forget the Internet. Many companies now offer online quotes.

How to Cut Your Insurance Premiums

The biggest difference you can make is to buy a vehicle that qualifies for a discount or at least doesn't carry a surcharge. Here are several other ways that you can save money on your car insurance:

* Most companies give a break to those who drive under a certain amount of miles per year. If you take public transportation instead of driving to work, your premium will go down. Out of the question? Try carpooling.
* Make sure you get all the discounts you are entitled to. You might qualify if your vehicle has an alarm, for example.
* Review the status of all the drivers in your family with your agent. Most discounts apply only to one portion of the policy, so don't expect dramatic savings.
* Increase your deductible for collision and comprehensive. Also, think twice about filing small claims with your insurance: Why risk a premium increase?
* Shop around. Another company might have better rates, but you won't know unless you shop.
* Drop collision coverage on older cars. Claims are limited to "book" value, so you're not likely to get much anyway if your car is more than seven years old.
* Be a good driver. Avoid accidents and traffic violations and you will be rewarded with good-driver discounts. Bad driving is expensive.

Financing

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 Money

Even though cars are more affordable than they used to be, prices are still high. In 2007, the average new vehicle sold for about $28,000.

Cars sold between individuals and by independent used-car lots tend to be cheaper. 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.

Bankrate.com reported at the end of 2007 that the average new-vehicle rate was about 6.9 percent for a 4-year loan and about the same for a 5-year term.

What's Your Credit Score?

Dealers and other retailers rely firmly on those credit scores, which are calculated by organizations that specialize in keeping track of credit applicants. 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.

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. . .

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.
* 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.
* 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.

In recent years there's been a trend toward long-term loans for new vehicles: 72-month and even 84-month loans.

Here's an example of monthly payments and the total amount paid for a $7500 loan at 6.9 percent annual percentage rate (APR) for various loan periods:

Source: consumerguideauto.howstuffworks.com