You’re shopping for a used car and have a set a budget based on the monthly payment you can afford. You find a used car that’s inside your limit, but also a car you like better that’s above that monthly figure. Should you succumb to your feelings and buy that more expensive vehicle or stick to your budget and purchase the cheaper car? You’d be surprised by the math.

Let’s say you planned your budget around making a $2,000 downpayment on a $14,000 car. Financing the remaining $12,000 for 48 months at Eastern Financial Florida Credit Union’s rate of 5.74% will cost you $280.39 a month. Not cheap, but not over your budget, either.

OK. You think you’re done, but after a little more shopping, you come across a better car with more features. The hitch: It costs $16,000 and the dealer won’t go a dime lower. Should you step up to that vehicle? And how much will that higher price tag pinch your wallet? Using the same term and rate, and borrowing $14,000, your monthly payment will jump to $327.12.

That’s an extra $46.73 a month, or $2,227 over the life of the loan. Wait a second. Wasn’t the difference in price $2,000? Yes, and when you subtract that from the total payments, the extra interest totals $227, or just $4.72 a month. So it’s not the interest that bites into your budget, it’s the higher price.

What should you do? Go back to your budget. Be honest with yourself: What are you willing to give up every month for the next four years to own the nicer car? Will you cut back on new clothes, dining out or vacations?

If your budget is already stretched, what can you do to make more money? Are you willing to take on a second job? Sell products in your spare time? Almost every financial decision involves a trade-off. Because the extra monthly interest on that car loan will cost you less than a hamburger at a sports bar, it’s the principal (pun intended) that matters.

There is such a thing as free money on some new cars. Auto manufacturers are promoting certain models with zero percent financing. But the choices are often limited and a new car that’s hard for the dealer to sell when new may also be hard for you to sell when used.

Even on popular models, new cars generally have lower loan rates than used cars. But how much difference does that make to your wallet? Let’s compare the cost of borrowing $10,000 for four years  from Eastern Financial using its recent car loan rates.

With a new-car loan rate of 4.49%, you’d pay $227.99 per month. On a used-car loan rate of 5.74%, the monthly payment would rise, but only slightly to $233.66 per month.

Does $5.67 a month seem like a lot of money to you? Even over the 48 months, the difference adds up to only $272.16. That’s a little more than one month’s worth of payments on either the new or used car loan.

The dollar difference increases if you double the amount borrowed to $20,000. But most budgets can accommodate an extra $11.34 a month. So unless you find that perfect new car and at that perfect zero percent rate, don’t be deterred by the higher rates on used-car loans.

Geri Detweiler

Two of the smartest writers on personal finance, Gerri Detweiler and Harriet Johnson Brackey, offered up these tips to autoloandaily.com on how to improve your FICO score. Detweiller suggests that you:

• Check your credit report and fix any mistakes. For example, you may find that another person’s negative credit information has accidentally made it onto your report. You could also discover that a loan you paid off is still has a balance. In that case, contact the credit report issuer with the correct information.
• Do not close old accounts. Typically, it hurts more than it helps it.
• Pay down your credit card balances. This more than anything else will help you improve your FICO score.
• Don’t open a lot of new accounts before you go car shopping. One account opened every six months is a general guideline, but not a FICO rule.

Harriet Johnson Brackey

Brackey offers these suggestions for upping your FICO score:

• Pay down credit cards to 50 percent or less of your credit limit . This will give your score an immediate boost.
• Pare back the number of credit cards you carry to two or three. Consolidate accounts to eliminate small balances.
• Don’t open unnecessary lines of credit, such as those offered at stores. The inquiries alone will raise a question mark with the auto lender.
• Don’t be late on other payments, like your electric and cable bill. Your credit report contains that information, too. Several late payments could affect your score.

The cloudy outlook for General Motors and Chrysler may have you rethinking which used car to buy. If those companies declare bankruptcy, will there be parts and service for those companies’ models? What might happen to the dealership where you bought your vehicle?

The good news is that there are many parts suppliers that will keep your car running even if the particular make and model is discontinued. You should have to no trouble finding brakes and spark plugs.

The bigger question is which lender will provide the financing. In these uncertain times, you can find reassurance from a solid financial institution. Some banks close to Wall Street are having financial problems and taking federal money to bolster their balance sheets. Institutions far from that situation are on more steady ground. Therefore, consider financing a used car at a credit union such as Eastern Financial. It provides competitive rates and the convenience of an online application form.

Eastern Financial can also help you shop for a car through its partner, AutoAdvisors. The no-cost service negotiates the best deals for members, eliminating the time and hassle of dealing with a showroom salesperson. AutoAdvisors also helps shoppers for new cars.

The same lending practices that created the sub-prime mortgage mess could hurt you when you try to finance a used car. A recent study found that a growing number of car buyers are having trouble obtaining and paying for certain types of loans called indirect loans. Indirect loans are those arranged by a third party, typically an auto dealer, and they account for 90 percent of all car loans, according to the American Bankers Association.

More than 3 percent of borrowers with indirect auto loans were 30 or more days late on payment in the third quarter of last year, the association reports. That’s the worst figure since the industry group began collecting data in 1980.

Not only are borrowers falling behind, but “evidence suggests that fraudulent practices with regard to both the condition and financing of used cars are on the rise,” Rep. Bobby Rush, D-Ill., the chairman of the House Subcommittee on Commerce, Trade and Consumer Protection, told McClatchy Newspapers.

To be fair, most dealers are honest and do not want to take advantage of buyers. They are not the lenders, though. A host of companies provide financing choices through the dealer. Consumer advocates such as the National Consumer Law Center want tougher rules that protect borrowers. While Congress ponders changes in the law, here’s what you can do:

• Arrange financing before you shop. Have a lender, such as your credit union, tell you how much you can afford to borrow and how much that will cost you each month. Stick to your pre-approval at the point of sale because you know exactly what you have.
• Don’t be drawn into the dealer’s finance office. A dealer may say you will get a better price or some other deal if you borrow through his finance office. Now you are on “his turf” and you’ve lost the advantage of your pre-approved financing. Politely say, no thanks.
• Don’t agree to financing add-ons. You may be offered a variety of insurance or warranty coverages, all of which are major money makers for the dealers. In fact, the sales price of your car has almost nothing to do with dealer profit. The add-ons are where they make money. Some of these coverages can be valuable but not when you pay too much. Your not-for-profit credit union will offer the same or better coverage for up to half the cost.
• If it all seems like just too much of a hassle, use your credit union’s no cost buying service and let them handle the entire transaction for you as a credit union member benefit.

Most car dealers are honest, but some lenders use a trick called yo-yo financing. Here’s how it works, the center says:

• The buyer drives off the lot with a used car thinking that the financing is in place.
• Several days later, the dealer calls to say that the financing couldn’t be arranged at the original terms.
• The buyer returns to the car lot only to to be told that the new loan has a much higher rate.
• If the buyer tries to back out of the deal, the dealer often says that is not possible.

“Often the customer is in no position to refuse the new onerous terms,” said John Van Alst, a center attorney, told a reporter for McClatchy, which owns the Miami Herald.

How do you avoid being a victim? First, line up the financing before you shop for a car. Ask your credit union or other regulated lender how much you can borrow, for how long and at what rate. Second, be leery of deals that seem to be too good to be true. If you have had credit problems, you know you will not qualify for a low, low rate reserved for only the best borrowers. Third, do not accept any offer that requires you to sign on the spot. If the lender is serious about you as a borrower, the loan should still be available the next day or even the next week. Don’t let high-pressure tactics force you into a bad deal.

Anyway, lately it’s been about nine used to one new on the car loans and people are definitely either buying down a bit or they’re just afraid of not getting the deal they need on a new car. The rule remains the same – check with us first for qualification and rate and use our no-cost buying service so you don’t get jammed up in the dealer’s selling cycle and pay more than necessary on price and add-ons.

Thrifty Buyers Avoid Paying New Car Depreciation

Repeat it. Say it in your head. See it in the clouds on the horizon. Write it on a sticky note and put it on your computer. Teach your parrot to say it. Carve it in a block of wood and put it on your coffee table.

My father-in-law bought a 2001 Cadillac DeVille (beautiful in red) in 2006 for about $15,000 – maybe a little more. That car sold new at about $40,000. It only had 40,000 miles – it wasn’t “brand” new but it was nearly impossible to tell the difference.  He could have bought a new car but he elected to keep at least twenty-five thousand dollars in his pocket for virtually the same thing. Certainly he got virtually the same enjoyment. Sure, he could have gone to the auto parts store for a can of new-car smell and sprayed a shot inside.

Car dealers absolutely LOVE to sell used cars. They get good ones in on trade from those people who do not believe in the above rule and they hammer the customer on the trade-in price. Hammer them. Then they charge the next buyer a pretty good price (you can work it) when they resell it – but since they HAMMERED the person who traded it in, they make a huge profit and more than likely, you still get a good deal. They sell new cars “at dead cost” (you’ve heard that one, right) and then make their money on the add-ons (insurance, vehicle warranty and all that) but with the used car, it’s cleaner and more profitable.

Don’t ruin the purchase – make sure you get a great used car loan. The EXPERTS in making used car loans are credit unions. They live, eat, sleep, breathe, ride up and down the elevator for used car loans all day long and some weekends. I’ve worked both sides (bank and credit union) and there is no comparison for this particular product. Credit Union used car rates are usually just a little higher than new car rates. Most other used car loan rates are much higher. Most Credit Unions also sell deeply discounted GAP Insurance, Vehicle Warranty Protection, AD&D Insurance and others at prices that will save you hundreds if not thousands of dollars. Check it out. Call them, visit them, use their no-cost buying service but get your loan from your credit union. Don’t have one? Find one here at credit union finders.

I’m not driving the Trooper all that much. Nine miles to work, some side trips to Home Depot – that sort of thing. If I do 10,000 miles a year, that’s a lot. OK, so at four bucks a gallon, and 555 gallons a year, I’m out $2,222 for gas. Ouch. Let’s say I go nuts and get a little car with 34 MPG (if you can find one at that performance level) and for the same 10,000 miles, I am only using 294 gallons. Whew – much better. Life is great and I’m only spending $1,176 on gas. I’m saving $1,046 a year in gas (yeah, and helping thumb my nose at the foreign oil barons.)

BUT – there’s the small matter of PAYING FOR the new car. My SUV as a trade-in is virtually worthless. Some dealers are not even taking trade-ins because of this gas mania. So, maybe I sell it privately and get $5,000. OK.

Now I have a $17,000 little car plus $1,020 tax minus my $5,000 down. I owe $13,020.  I get a four year loan at 6% and that costs $305.78 a month or $3,669 a year. Plus the cost of gas makes it $4,845 a year for this very inexpensive little car. So now my choice is $2,222 a year for gas only on my low-mileage, very good condition, paid-for SUV or $4,845 a year for the little car. That’s more than twice the expense, all to save a few bucks on gas. Does it make any sense at all? Should I spend $2,623 a year ($218 a month) MORE to use less gas?

Yeah it hurts to see $70 at the pump but knowing that I would spend almost $220 MORE a month to use less gas just doesn’t make sense.  Of course, this just applies when you have a gas-eater that’s paid for or close to being paid for.

If you have a guzzler that still has a big loan on it, your choices are limited. You are going to take a big hit on residual value – there is no way around it. So you can do the math again. If you owe $10,000 for example, and “no one” wants your beast – say all you can get is $6,000 if you are lucky – then what about that missing $4,000? That’s got to come from somewhere. That’s equal to a thousand gallons of gas, probably two years worth. Then you still have the down payment to find on a new car and the new car payments if you opt out.

So the short story is don’t just dump your truck or SUV because gas is expensive. It may be more expensive to cut and run. Just think it through, do the math and chose the lesser of two evils. Unfortunately, those are the only two choices you may have.