Factoring Gas Mileage into an Auto Loan
Richard BarringtonLoanBiz Columnist
In response to higher
gasoline prices, American car buyers are turning to smaller, more
fuel-efficient cars. For many shoppers, gas mileage has become the new
horsepower. The upside to this is that every dollar not poured into the gas
tank can be put towards a higher monthly car payment. This means that a car
buyer opting for a more fuel-efficient vehicle can afford a bigger auto loan,
and thus a better car. As Americans trade in their oversized SUVs for sedans
and even hybrids, the difference can be eye-opening.
Fundamental Budgeting
Any car purchase should start with some fundamental
budgeting. Budgeting starts with a good estimate of how much room there is
between monthly income and monthly expenses. The buyer can then decide how much
of this margin can go toward a car payment. The next step is running that
figure through a car payment calculator to see how big an auto loan it will
support.
There may be some trial and error in this process, as the
buyer runs different scenarios on the car payment calculator to see, for
example, how much of a difference a longer loan term would take. In the end
though, there should be a chain of logic leading from the monthly budget to the
car payment to the auto loan to the cost of the vehicle.
Factoring in Better Gas
Mileage
Factoring in better gas mileage fits neatly into the first
link in this chain of logic. Saving on gas mileage will impact the monthly
budget, and by extension, the size of the auto loan the buyer can afford.
To calculate this, the buyer needs to know four things:
- Gas mileage on the current vehicle
- Gas mileage on a likely new vehicle
- Number of miles driven per month
- Current
price of gas
All the buyer needs to do is subtract the answer to #1 from
the answer to #2, then multiply the result by #3, and finally multiply this
result by #4. The outcome is the monthly dollar savings from greater fuel
efficiency -- some or all of which can be put toward a bigger car payment.
Impact on Auto Loan
This can have a significant effect on an auto loan. For example,
someone commuting 25 miles each way to work drives at least 250 miles per week.
With gas prices around $3.20 per gallon, upgrading mileage from 20 miles per
gallon to 35 will add $68.57 to the monthly budget -- not a bad contribution to
a car payment!
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
