by Steven Gomez

Created on: April 02, 2009

Paying for a vehicle with credit makes the most sense for the most people, but taking out an auto loan isn't always a smart decision. The loan itself isn't an inherently good loan or a bad loan: it varies not by the terms of the loan, but by the recipient's circumstances.

In any case, you don't want payments on a car loan to eat up more than 10% of your monthly overall income. You don't want your payment on a car or truck to be the burden as big as a rent/mortgage. Keep in mind you've got other bills and responsibilities to worry about, and you need to have enough money left over to pay your other bills and still be able to eat.

You want a low interest rate in the 5-6% APR range with no strings attached, and you want to invest in a vehicle that will provide and retain value for you well after it's purchased: a car that gets poor gas mileage, has mechanical problems or quickly deteriorates in blue book value isn't a good value, and taking out a loan on such a vehicle is in effect a bad debt. The key to a good auto loan isn't just about researching your loan options, but researching your potential purchase and making sure it's worth making payments on for the next 3-5 years.

You also generally want to take out an auto loan earlier in life, when you're still building credit and haven't invested much of your assets, than later in life when you have a credit history (good or bad), a vehicle you can trade in to offset the cost of a subsequent vehicle, and you've already spent tens of thousands of dollars on other vehicles: you're simply spending that money all over again.

That said, not everyone can plan their next auto purchase. Some have a decent vehicle and can afford to wait for the right vehicle and the right financing. But some people need a car now (the last one broke down, perhaps), don't have the cash on hand, and don't have much say in whether they can take a loan or not. In this case, you have to bite the bullet and take what your credit can get you, but getting an inexpensive used vehicle is probably the best investment here. You won't need as big an auto loan and your vehicle shouldn't depreciate as much in value as a new car would.

Basically, an auto loan is a good loan when you do your homework on both your loan options and the right vehicle, then make a smart purchase on which you can easily afford to pay back the financing. Smart decisions lead to good auto loans.

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