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How to buy a new car without wrecking your finances
Buying a new car is a big decision. Not so much the make and model, but more about the financial responsibility that comes with it. Unfortunately, what we want and what we need are often at odds with each other, and car buyers end up purchasing a vehicle with a price tag that exceeds their budget…and then some.
Here are a few tips that can help keep your next car purchase in line with what you need, want, and can afford:
All purchases are not created equal
You may have purchased a pair of Manolo Blahnik shoes that were more than a month’s rent, or a new, state-of-the-art gaming system that set you back a few bills, but those splurges can be contained and could be considered short-term lapses in smart financial judgment. They busted your budget, but over the next few grueling months, you can probably get back on track by skipping your daily Starbuck’s run, clearing your calendar, and eating ramen noodles.
Purchasing a car that’s too expensive for your wallet could possibly tie-up your finances for the next 60 months. That’s five years of monthly payments that you may or may not be able to consistently afford. The golden rule of car buying is to NEVER ignore the total price of the car. Regardless of how they package the financing, it won’t change the actual cost. Consider purchasing a vehicle that’s below your means, unless of course, what you’re driving means more to you than your financial sanity.
Down payments are smart…and rare
Ask most car salespeople and they’re likely to say that the percentage of buyers who put down a substantial down payment is pretty low. Whether you fund it with a trade-in or cash that you’ve been saving, a down payment will lower the amount of money you’ll have to pay over time. It’ll decrease your monthly loan payment and hopefully, bring it in line with your budget.
What do you really need?
Make a list of your “must have” and “nice to have” options before you visit the dealership. Everyone wants the newest and coolest features, and for just a few hundred or a couple thousand more dollars, you can have it all…heated seats, parking assist, wi-fi, keyless entry, and a navigation system. Yeah, they’re nice to have, but here’s where you have to determine what you need and what you want because it all leads back to the golden rule.
Rolling over debt is not a solution
Don’t trade one financial problem for another. For the people who get tired of their cars after a few years or feel the need to upgrade their ride every other model year, the idea of holding onto their vehicle until the loan is repaid seems preposterous. To keep themselves in a new car and avoid any down payment, they simply roll one purchase into the next. The deficiency on their current car, because it was worth less than they owed, is added to the new car loan. It’s an ugly cycle that is truly detrimental to your financial health.
Watch for hidden costs
Another thing to consider beyond the price of the car is insurance, repair, and maintenance costs. Generally, the more pricey the car, the more expensive it is to insure and take care of. Talk with your insurance agent to determine how much your monthly insurance premium will increase. Research costs so you’re able to plan for routine maintenance and repairs. Some of the results might lead you away from certain makes and models and toward more reasonably priced alternatives.
Hopefully, these tips will keep your next car purchase from wreaking havoc on your finances. Do your research, consider your budget, and keep your emotions in check. Remember, the decision to buy a car isn’t a “one day and it’s done” choice. It’ll impact the way you manage your financial life for years…and that’s a long time to eat ramen noodles.
The worst advice you can get about buying a car
Are you in the market for a new car? Some people love car shopping and like to think they know all the secrets to getting the best deal. Mention that you’re even thinking about buying a car, and they’ll grab your ear for the next hour telling you about every car they’ve bought and sold over the last 20 years. Heck, they might even offer to go to the dealership with you just to show you how it’s done.
Surely they have your best interest in mind, but people are full of advice that sometimes isn’t as wise as you—or they–might think. You can be kind and let them babble all they want, but in the end, this is likely what you’ll hear:
The wealthier you look, the more you’ll pay
Many think that dressing poorly when you enter the dealership leads the salesperson to believe you don’t have a ton of money. To sell a car, they’ll need to give you a bigger discount. Not true. People come in all shapes and sizes…and grooming habits. Regardless of what you’re wearing, the dealership will ultimately run a credit report, the true picture of your financial standing and credit worthiness. Showering and dressing in your normal casual attire is your best bet. That way, no one will be afraid to get too close.
Wait until the last minute to mention your trade-in
It’s the same thing with coupons, right? You’ll jack up the price so when I pull out my discount, you’ll already have a cushion. Wrong. Why do you think some car dealerships will buy your trade-in even if you don’t buy their new car? Trade-ins make money. In fact, your trade-in, depending on popularity, supply, and demand, may be worth more than you think to the dealer. It’s also more likely that you’ll be able to afford that new car, so the dealer has incentive to offer you the best price.
If you spring your trade-in at the last minute, the salesperson will have to go back and rework all the calculations and paperwork he’s completed so far, a complete waste of time. You’ll also know what the dealer is offering for your trade-in, which will help you decide whether to accept the offer or to sell it privately. No matter what, though, be sure to check the Kelly Blue Book value, so you have a ballpark idea of a fair price.
Focus on the monthly payment, not the total price
Yikes! What kind of math is that? Just because you can afford a monthly payment, doesn’t mean it’s a wise purchase. Consider this: Your new car depreciates as soon as you drive it off the lot, but for the next 5 or 6 years, you’ll be paying the same hefty payment each month. Plan to trade it in in a year or two? You might be upside down and owe more money than it’s worth. In addition, you’ll need to consider what will change in your future finances. Will you be buying a home, raising a family, paying for college, or facing unemployment? The financial decisions you make now will impact you in years to come.
Buy it before someone else does
You’ve found your dream car. It has every upgrade you wanted, the perfect color, and it’s the only one on the lot. Grab it and run! No, wait. STOP—and come to your senses. There is more than one dealership and, chances are, there are other cars that will make you feel all warm and fuzzy inside. If not, a dealership can always factory order one. A hasty decision can have tragic financial consequences. If a salesperson uses the “buy it before it’s gone” tactic, it’s only because he’s trying to nail down a sale. Don’t fall prey. Take the time to do your research and price comparisons.
Buying a used car is taking on someone else’s headache
Who says a new car is the only way to go? It’s likely your very vocal co-worker who bought a car from Bob’s used car lot and got stuck with a lemon, or maybe it’s your Uncle Fred who bought his last car in 1975. It happens, but considering your new car loses between $3,000 and $5,000 once you drive down the road, you might want to reconsider.
Pre-owned cars are big business in today’s market, especially with the number of drivers who opt for car leases that expire after three years, on average. Other inventory may be the result of fickle car owners and their desire to have the latest and greatest features and model. There are some advantages to pre-owned cars, especially when you purchase through a reputable dealer. With limited miles and a few years under its belt, all the kinks have been worked out, and the dealership has likely put it through a 100-point check. Some may still be under the manufacturer’s original warranty.
When you’re purchasing a car, you’re in the driver’s seat. Do your homework, take your time, and don’t be pressured into something that doesn’t meet your needs or satisfies your comfort level. Everyone will give you their two cents because, well, they want to help. Take it for what it’s worth, but don’t base your decision on someone else’s experience.
Five financing options to consider when buying a new car
If you’re walking into a dealership before researching your auto financing options, you’re already at a disadvantage. Like the price of a car, interest rates are negotiable and depend heavily upon your credit rating. Understanding your options— and in some cases having a check in hand — puts you in control of the transaction from the beginning. It demonstrates the fact that you’ve done your homework, you’re a serious buyer, and you’re ready to make a purchase.
There are several different avenues you could take when trying to secure the funds to purchase a car. You could pay cash, borrow from family, finance it through the dealership, a bank or a credit union. Let’s look at all of your choices and see which one might be the wisest choice for your individual situation.
It’s difficult to see the entire cost of a car disappear from your bank account, but think about this: when you pay with cash, you’ll actually limit the amount of money you’ll spend on a car. With financing, you’re not overly concerned with the final cost, within reason, so you tend to overspend because it’s not coming out of your bank account at one time. If you’re paying cash, you have a hard stop and have to prioritize what’s important to you. Cash avoids a monthly payment and saves you the additional cost of five years of interest. Best of all, a cash purchase will likely allow you to negotiate a better purchase price.
2. Family loan
Borrowing money from family or friends sounds may be a smart option, especially if your credit score has fallen on hard times. The people closest to you may be more willing to help than a bank, in this case. Problems may arise, however, if the loan payments are not made on time or are unable to be made at some point in the future so be sure to plan for those scenarios. Draw up formal documentation with loan repayment dates, interest charges, and a detailed plan for defaults. The loan should be viewed with the same importance as any other financial obligation.
3. Bank loan
A bank can offer some competitive rates in financing a car loan, especially if you have a higher-than-average credit rating. While the bank is an especially convenient option—multiple branch locations, close to home, online account management— banks tend to have very conservative loan policies and can be very choosy about whom they offer their best rates. Some banks offer a discounted interest rate if you have other banking products through the same bank. For example, many offer a .25% interest rate discount if you agree to automatic bill pay for your car payment each month.
4. Credit Union loan
Credit Unions and banks have similar loan processes, but you may have a better chance of getting approval if your credit isn’t exactly stellar. Credit unions are more apt to listen to your individual situation and make adjustments as they see fit. Interest rates are comparable and they offer a more personalized, relationship-based service. Credit unions work hard to provide a very high level of customer service. Talk to a dedicated professional openly and honestly about your financial situation, flexible repayment plans and any other concerns you may have about your potential loan. The credit union is truly working with your best interest in mind. Most credit unions offer an educational and resources center with information on the different types of finance options, among other topics, and how to make the best decision possible.
5. Dealership loan
According to the Consumer Financial Protection Bureau, “when consumers finance an automobile purchase from an auto dealership, the dealer often facilitates indirect financing through a third party lender.” The dealership generally offers you a higher interest rate than the bank or credit union would in order to make money from the loan. This is typically called the “dealer markup” and it can make the loan very expensive. Yes, a loan from the dealership is quick and convenient, but it’s likely the most expensive auto loan option you’ll have. If you’ve done your homework and you’re up for a challenge, you may be able to negotiate the initial interest rate offer from the dealership, so be sure you come prepared!
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.
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.
Best Resale Value Vehicles
Most experts agree that the best time of year to purchase a new model car is in January and February – plus, if you finance with us by January 31 this year, you can enjoy 60 days of no payments*! Sales at the beginning of the year are usually slow and dealers start to raise prices as the year progresses. One thing to keep in mind when buying a new ride is the best resale value vehicles. As you probably know, cars start losing value the second you drive off the lot which is a bad thing if you think you’ll resell or trade it down the road. Resale value begins when you buy the “right” car in the first place. Here are a couple of things to look for that affect resale value.
Color — Standard colors are much easier to sell than trendy colors.
Upgrades and options — Options like leather seats and sunroofs add to a car’s value, but a navigation system or upgraded stereo won’t bring any extra money when selling. Also, automatic transmission is much more popular than manual transmission.
Geography — Demand for vehicles varies in different parts of the country and even in different communities. Convertibles may be good for warmer weather states, but it’s not as valuable in the colder northern states. Likewise, a pickup truck holds less value in bigger cities as opposed to rural towns.
These are just a couple of tips to consider when purchasing a car. Though resale value is important to many who purchase a new vehicle, if you plan to keep it until it dies, then you won’t need to worry about the resale value.
*Restrictions apply. Offer valid December 1, 2016 through January 31, 2017. No payment period only applicable to first 60 days of the loan. Interest will begin to accrue as of the loan date.