Whether you’re buying a new or a used car, upgrading from your old vehicle is always satisfying. And if you’re a first-time buyer, it’s a huge milestone in your life.
Unfortunately, it’s easy to make mistakes when buying a car. For example, many car buyers upgrade to a new vehicle before they’ve paid off their current vehicle. This often leaves them holding debt and paying interest for a car they’re not driving anymore by carrying negative equity into a new car loan.
So, what do you need to know before buying a car? Here are some helpful tips.
Get Preapproved For Financing
The number one thing you can do to smooth out the car buying process is to apply for a loan preapproval. There are many ways to do this, whether you want to visit a local bank or credit union, apply at a national bank, or even go through an online lender.
The primary benefit of pre-approval is getting a better idea of what cars you can afford. You’ll find out what kinds of interest rates you can qualify for, which will dictate your monthly payment. And if you have any issues with your credit, you’ll have an opportunity to clear up those issues before you walk into the dealership.
Another benefit of preapproval is that the dealerships will often offer you a higher rate than what you may actually qualify for. In this example, you might be eligible for a rate of 5%, but the dealership gives you a rate of 9% instead. Salespeople get a commission for this since that extra interest is split between the dealership and their finance company.
In that scenario, and having not gotten preapproved, you would have no idea that you’re paying a higher rate than necessary. If your lender preapproved your loan, you would have the option to decline the dealership’s financing offer and stick with your original lender. In some cases, the dealership may even be willing to negotiate and offer you a lower rate than your lender preapproved.
Negotiate Price First
When you go to a dealership, the salesperson will often ask you many questions during the sales process. Some of these are designed to help smooth things out for both parties. For example: “What kind of car are you looking for?” On the other hand, other questions are designed to help them potentially get a leg up on you during the negotiation process.
Salespeople will often ask you upfront whether you have a trade-in and whether you will be financing through the dealership. Do not answer these questions until you have first negotiated a price.
A salesperson will sometimes be less willing to negotiate on price if you’re not financing with them or trading a vehicle in. If someone has a trade-in or is going to want to finance, they will often charge less for the car, then offer less for the trade-in and less-favorable financing terms. Playing your cards close to your vest gives the dealer as little advantage as possible in the negotiation process.
Avoid Dealership Add-Ons
Add-ons are another method dealerships use to make extra money on their sales. When selling add-ons, dealers will often take advantage of the fact that you’re already tired of negotiating by handing you off to a fresh, cheerful finance manager.
A finance manager’s job has two parts. The first is to facilitate loans for the dealership’s customers. The second is to sell “premium” features to package with the vehicle sale. These add on’s run the gamut, from paint protection and corrosion-proofing to extended tire warranties.
They’re almost always overpriced, and finance managers will try to make the cost look cheaper by telling you that they only cost a few dollars per month. But even an $8 per month charge, spread out over a 60-month loan, comes to $480.
Extended factory warranties can be a good deal, but you can buy them any time before your standard warranty expires. If you decide to purchase one later, shop around with different dealers since different dealers will offer different prices.
Stick With A Shorter Loan Term
Longer-term car loans are becoming more and more common these days. They come with lower interest rates, making them popular, particularly with younger buyers and those living on a fixed income.
Unfortunately, long-term loans have a couple of drawbacks. To begin with, the longer the loan term, the more you pay in interest, even if the individual monthly payments are lower. Not only that, but with a seven-year loan, there’s a higher chance you’ll want to sell the car before you pay it off.
For new cars, it’s best to stick with traditional five-year auto loans. You’ll pay more monthly, but you’ll save money in the long run. For used cars, 36-month loans are ideal because they’re more likely to be paid off before the vehicle requires any serious repairs.
Know Your Budget
Most financial advisors recommend that your total car expenses cost no more than 20% of your monthly take-home pay. That includes gas, insurance, maintenance, and other costs, so spending 10% or 15% of your income on your car loan is more realistic.
Of course, you also need to pay your other monthly bills. If it turns out that you can’t afford a brand-new car, don’t be afraid to widen your horizons. Today’s cars last far longer than those of the 80s and 90s. Depending on its condition, a used car with 100,000 miles can still be an excellent value.
Many people go their entire lives without ever buying a brand-new car. You can then use the money saved to buy other things.
Summary
The car buying process has many potential traps for unwary buyers. By following these tips, we’ll better equip you to navigate that process and avoid pitfalls. Now, all you have to do is decide what car you want.
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