Why you should focus on price versus monthly payment when buying a car
Should you be more concerned with the purchase price or monthly payment when buying a car? Ask ten people and the answers will most likely be split right down the middle. From a financial perspective, however, it’s smarter to negotiate based on the purchase price of the vehicle. The amount of the monthly payment can be sliced and diced any number of ways, but it all adds up to one number in the end.
Why focus on the purchase price vs monthly payment?
The purchase price of the vehicle, plus interest, is the amount of money you will pay over the life of your auto loan. There are several factors that can impact this amount:
Your credit rating: The lower your credit rating, the higher your interest rate. It’s smart to work on raising your credit score before making any large purchase. You are entitled to request a free copy of your credit score from all three credit agencies on an annual basis. Check it thoroughly to ensure all the information is correct, no unexplained delinquencies are noted, and any open issues are resolved. Anything less than an excellent credit rating will cost you more money in interest than necessary.
The term of your loan: A standard car loan has steadily crept from 60 months to an increasingly common 84 months over the last few years. Simply stated, the longer it takes to pay off your loan, the more money you pay in interest, which increases the overall cost of the car.
It seems that most buyers are more concerned with negotiating a specific monthly payment rather than the total price of the car. They have room in their monthly budget for $300 and not a penny more. Kudos for being budget conscious, but understand the consequences of extending the term from 60 to 72 months simply to create a lower payment amount. An additional year of $300 payments plus interest only increases the total cost of the car.
Another consideration is the length of time you plan to keep your car. Will you be ready to trade it in or sell it in 3 or 4 years? How much equity will you have accumulated, especially if you didn’t make a large down payment? Cars generally depreciate 22% in their first year and the longer the term of your loan, the longer it takes to build up equity.
Know your options
While monthly payment negotiations could very well put you in the driver’s seat of your ultimate dream car, it might not be the most financially sensible approach. It’s important to understand the choices, the alternatives and their long-term effects on your wallet. Going into any purchase with the knowledge of how it works and what your options are makes you a better consumer and a smarter decision-maker.
Buying your first car – how the process works
Purchasing a car can be an intimidating process, especially if you buy into the over-dramatized, stereotypical depiction of car salespeople and dealerships. Here’s the catch, though–it doesn’t have to be. When you’ve done your research, you know what you want, and you’re ready to buy, YOU’RE in the driver’s seat. Here are some steps that will help you effectively manage the car buying process with confidence.
Check your credit score
Before your visit any dealership, be sure to check your credit score. Your credit score is a three-digit number that reflects your individual creditworthiness. It quantifies the likeliness that you will repay your credit obligations and is the best prediction of risk a lender can assume when extending credit to you. Consumers have the right to one free credit report annually from each of the three credit reporting agencies. If you haven’t yet requested your copy, click here.
Loan pre-approval
Once you know your credit rating, visit your credit union to meet with a lending officer. They’ll review the loan options best suited to help you manage your purchase and the subsequent payments. By planning in advance of your trip to the dealership, you’ll be able to get pre-approval for a dollar amount that fits within your budget and comes with a competitive interest rate. This will alleviate the pressure to accept the dealer’s convenient, but often unfavorable financing.
Narrow down your car choices
Before you start looking for a car, decide on the features you need and want in a vehicle. Do you want a sedan or an SUV? Are leather seats a necessity? How about an entertainment system? What safety features are a must? Make a list of features and prioritize them in terms of importance. This list will help you start to narrow down your vehicle choices.
Do some research online. There are many websites that can help you decide which cars might be a good choice. KBB.com reports information from Kelly Blue Book, JDPower.com/cars is an especially good resource if you’re looking to research reliability, and ConsumerReports.org’s annual car issue is an excellent source of independent rating by an unbiased third-party.
Once you narrow down your choices, spend some time visiting dealerships and test driving the vehicles at the top of your list.
Avoiding the lemon
Today, people frequently trade in their cars after a year or two or after their lease expires. No longer is the used car lot full of old clunkers. In fact, pre-owned cars can often be a better deal than buying new. To make sure you’re not inheriting someone else’s headache, be sure to make your purchase through a reputable dealer who has to answer to manufacturers. Look for cars with low odometer mileage, which typically means less wear and tear, and those with warranties still in effect.
Also, be sure to request a copy of the vehicle’s history report, like Carfax, to see accident, repair and title information.
Finalizing the deal
When you’re satisfied that you’ve found the right car, one that meets your needs and fits within your budget, meet with a salesperson to negotiate the price. You’ll need to contact your credit union, provide them with some information, and coordinate payment before the deal is officially finalized and the car is delivered.
Any car, whether new or pre-owned, is an expensive purchase that warrants the appropriate time and attention. It’s not a quick and simple process. In the end, though, you’ll feel confident in the fact that you did everything you could to secure the best deal and execute the smoothest transaction possible.
That 0% Auto Loan from the Dealership Might Not Be the Best Deal
In seeking the best deal on your next car, you might’ve stumbled upon advertisements or offers to get a 0% interest auto loan. As great as this sounds, you may not save as much as you expect with this type of incentive.
Since auto loans can come through either a dealer or a lender, such as a credit union, it’s important to note that a 0% interest loan generally, if not always, is obtained through a dealer. Automakers offer them to attract buyers to certain car models, especially ones that aren’t selling well. Here are a few things to consider about 0% financing and why it might not be in your best interest to use it.
You might be forfeiting a better deal
Typically, you can’t receive both reduced rate financing and a cash rebate when you buy a car, so you may have to choose one. Manufacturers’ cash rebates can range from a couple hundred to a few thousand dollars. The well-known auto research website Edmunds found that the cost of incentives that automakers pay to attract customers was around $2,300 per car industrywide, which includes cash rebates and cost of reduced financing.
While a 0% loan may sound appealing, a cash rebate might save you more money. If you buy a $20,000 car that has a $2,300 rebate, you are really paying $17,700 plus interest. If your interest rate for a five-year loan is 3%, a typical rate, you will pay a total of $1,383 in interest. That brings the cost of the car plus interest to $19,083, saving you $917 compared with what you’d pay with a 0% loan. (Check out our handy Auto Loan Calculator!)
You may want to check the auto loan rates at local lenders too, since you might be able to get a low rate and pick up a rebate when you negotiate with the dealer.
Rate may not last as long as your loan
Some car models may have 0% financing for a limited term, such as five years, which could be less than the length of your auto loan. In the third quarter of 2015, the average loan term for a new car was five years and seven months, and the term for used cars was five years and three months, according to Experian’s State of the Automotive Finance Market report. These are the longest average terms calculated since the firm began collecting data in 2006.
You may even receive a longer loan if you want lower monthly payments than you were offered initially. If your term is longer than the 0% financing deal, you generally pay interest on the remaining months or years.
This offer can be limited
A 0% rate might only be offered for a handful of models, especially newer cars, and less for used cars or older models. But even if this deal is available for the car you want, qualifying for it typically requires a high credit score. Check on the eligibility rules for getting this rate before stepping onto the dealer’s lot if you can.
As you sift through car prices and incentives, remember that trade-offs are part of the process when buying a car. Although a 0% interest rate may save you money in some cases, you might also be letting a better savings opportunity pass you by.
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Best places to research before buying a car
Purchasing a car is a big investment, one that demands considerable research of makes and models, consumer reports, incentives, financing, and more. While some people thrive in this environment, others are quickly overwhelmed and don’t know where to start, so we’ve rounded up some of the best websites to visit in order to prepare you for your next car purchase. Armed with your research, your short list of vehicle choices and features wish-list, you’ll be in the driver’s seat before you know it.
Car buying 101
Edmunds.com is ideal for checking out new car deals, styles, models, road test reports and best car lists. There’s also the ability to compare new cars, help finding a dealer, details on current incentives and rebates (advertised and non-advertised), car reviews, trade-in value, and pricing. Use the calculator feature to help you determine, based on the features analysis, what falls within a realistic range of what you can afford along with your current obligations.
Bankrate.com is another option that helps with budget analysis. It helps you decide whether to buy or lease or if new or used is a better choice. Should you choose the lower interest rate or the rebate? Overall, Bankrate.com is an excellent resource for comparing auto loan costs and payment goals. It can also be used to manage other areas of your finances and tie them all together for a consolidated view.
Mint.com, every budgeter’s favorite, gathers together all of your family’s finances and lets you see the big picture. It will clearly show you how a car purchase will impact your overall finances and help you to determine your maximum budget. Continue using it after your car purchase and you can track spending patterns, banking, investments, and other financial planning.
KBB.com reports information from Kelly Blue Book.You can access new and used car prices, trade-in and private party values, find dealers, search local inventory, see vehicle history reports, read expert and consumer reviews and the annual new car buyer’s guide. There’s also a payment calculator and up-to-date information about rebates and incentives. Because Kelly Blue Book is a respected authority in car values and has been a trusted resource in car buying for decades, dealerships tend to pay close attention to this information and tend to weigh their recommendations more heavily than most.
JDPower.com/cars is an especially good resource if you’re looking to research reliability. Power Circle Ratings from J.D. Power are one of the only sources of consumer ratings based on independent and unbiased feedback from millions of verified car owners. The site gives you access to new car ratings and awards, new car buyer guides, financing and insurance, the latest car news, and other tips and advice.
ConsumerReports.org’s annual car issue is another excellent source of independent product testing, research and rating by an unbiased third-party. It reports on new and used cars, offers information on car buying and pricing, maintenance, and car safety. It addresses the best and the worst cars, the most and least reliable cars, and notifies you of recalls. While you’re there, check out their Build & Buy Car Buying Service.
CarComplaints.com is not a car comparison site, but it has tons of brutally honest complaints from owners about things that have gone wrong with their car. Find out which cars you should avoid, which manufacturers have the largest number of complaints and which have the least. Read about current defect trends, Lemon Laws, horror stories and funny complaints. You’ll also find technical service bulletins, recalls, and vehicle history.
Truedelta.com is 105,000 car owners sharing real-world information about their car driving experiences. It’s part car research, part comparison site. Get different viewpoints on reliability, pricing, features and benefits. Ask members for suggestions based on priorities, needs, driver types, and other categories. Search reliability and price comparisons, query common problem reports, and review most wish-listed car features.
The manufacturer’s website will list some of the most detailed information on the vehicle you are interested in purchasing. It will include shopping tools, the ability to compare models, how to find a dealer and search their current inventory. Can’t find one that has everything you need? You’ll be able to build your feature and color specific car from scratch.
Time well spent
When making a big purchase, knowledge is key. Spend the time figuring out exactly what you want and what you can afford before heading into the dealership. The research you do will save you time and money when you ultimately make the best deal possible for you and your budget.