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Factoring Gas Mileage into an Auto Loan

Richard Barrington
LoanBiz Columnist

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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:

  1. Gas mileage on the current vehicle
  2. Gas mileage on a likely new vehicle
  3. Number of miles driven per month
  4. 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.

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