I believe the key to a good car loan lies in this little phrase: Borrow as little as you can, for as short as you can, for as low as you can!

a) Borrow as little as you can. The more you borrow, the harder it’s going to be to pay it back. There are two ways to lessen the amount you borrow: Buy a cheap car and then put down a big down payment. Not easy. Not great for the ego. But, boy, does it make up in peace of mind!

b) For as short as you can. I’m old enough to remember when most car loans were for 36 months or less. Today, some car loans resemble home mortgages. Many people get "upside down" (a phrase meaning that one owes more than the car could sell for) because of loans that last 4, 5, 6 years — and even longer! People, this is crazy!!! I don’t like any loan repayment schedule that lasts longer than about 50% or 60% of the car’s reasonable life expectancy.

And remember, the longer the loan repayment schedule lasts—the more interest you pay. For instance, if you make a $20,000 car loan at 9% for 3 years, the total cost will be $22,896 (including interest of $2,896). But if you finance that same $20,000 car at 9% over a 6 year period, the total cost will be $25,963 (including interest of $5,963). That’s $3,067 more in interest payments!

c) For as low as you can. A third factor that can make or break your car loan is the interest rate. The time to arrange your loan is before you negotiate with the salesman. Dealers are notorious for charging higher rates. Many experts suggest first arranging your loan with a friendly bank or credit union, then start dealing. And, remember, everything is open to negotiation. Don’t hesitate to push for the lowest possible interest rate.

Of course, there are those too-good-to-be true factory loan deals that come along occasionally. If you run across one of these, go cautiously. Make sure you are clear about the rate, and that it applies to the car you’re thinking of buying. Be sure all finance rates are quoted at the annual percentage rate (APR) instead of an add-on rate that may appear to be lower. Never sign a contract until it has all the blanks filled in including the total dollar cost and finance charges. Other details should include the monthly payments and the length (or term) of the repayment schedule.

3) The Good: Paying With Cash. Wow! What a cool feeling! There is nothing else like it. You pick out the car you want and, because you developed a plan and stuck to it, you drive off the lot with a car that belongs to you! Not some lease company, or a bank, or a credit union. It belongs to little, ole you!

Believe it or not, 22% of cars and trucks are sold for cash. Who are these people who can buy a vehicle and pay cash for it? For the most part they’re people just like you and me who have made up their minds to get control of their lives. Instead of living like the masses, these are people who got fed up with business as usual. They decided that eating out all the time and buying designer clothes they couldn’t afford was crazy. They realized that getting ahead was something that only happens when you get really tired of being broke all the time. There was that moment in time when they finally got tired of living on the edge — so they changed things.

The good news is — you can do it, too. Don’t believe the lie that only rich people buy cars with cash. It ain’t true. Lots of people on their way to becoming financially free are buying vehicles and paying cash for them. Besides, how do you think those rich folks got rich? They didn’t do it by making interest payments to someone else.

Next time: Buying Cars with Cash