Buying a Car

Buying a car can be a dream come true, or your worst nightmare. So, be aware of taking the right steps to get the outcome you desire. You want to enjoy your car, secure in the knowledge that you got the car with the options and features you needed at an affordable price. Avoid a “rocky ride” by doing your homework and getting your finances in order before you visit a dealership or shop for a car. All it takes is time, a little patience, and the ability to pursue your car ownership dream with passion and attention to detail.

Determine How Much you Can AffordThe first step is to determine how much you can afford to spend on your new car. It doesn’t matter if you are buying or leasing a car, you should not begin to shop for a car without determining how much you can afford to pay and deciding on a realistic monthly payment that will fit within your budget. Don’t forget to consider the cost of tax, title, registration, insurance, and maintenance. Our Car Calculator can help you estimate how much car you can afford based upon the highest monthly payment you are able to make, which should typically not be more than 10 – 12% of your gross monthly income. Print this information and take it with you to the dealership. It will help you to stay within your budget during the negotiations. To learn how to develop a budget, consider taking our Building Your Wealth online course.

What Kind of Car Do you Need?When shopping for a car, focus on your needs, not your wants. If you don’t, you may find yourself buying a car just because it looks nice or is trendy. This will also help to avoid the temptation of agreeing to a purchase price and monthly payment that does not fit within your budget. So, take some time to think about the answers to these questions:

• What will you use the car for?
• How many people do you need to transport?
• What kind of driving do you most often do?
• How long is your commute?
• Do you need a car with good gas mileage?
• Do you want a manual or automatic transmission?
• What safety features do you want?
• Do you typically transport a lot of items or heavy equipment?
• Will the car easily fit in your garage or parking area?
• How long to you plan on keeping your car?

Research Prices
After you have determined your needs, use Internet sites like edmunds.com, kellybluebook, or the manufacturers’ website to compare the different cars that are within your budget and meet your needs. Using the internet to compare make and model information like mileage, engine size, crash performance, repair performance, and the like, makes you an educated consumer and will help you to narrow your choices. Be sure to research the invoice price and vehicle’s True Market Value (TMV), which is the average price buyers are paying for cars in your area. This will help you during the negotiation phase. After you have narrowed your options down, take a half day and test drive the cars you are considering. To avoid buying a car before you are ready, one suggestion is to go to a dealership that you would never consider buying a car from.

If you have not yet decided if you want a new or used car, research both options. There are benefits and drawbacks to each. However, what is most important is to have a good running car that fits within your budget, which sometimes makes buying a used car a better option financially. Buying new does not always mean that you will have fewer car repairs, and many used cars sold from dealers come with warranties.Look at performance records, reliability reports, and consumer reports of the make and model of the car you are considering using consumers’ automotive guides like: howstuffworks, edmunds.com, and JDPower.com.

Many dealerships are offering cash incentives which can make buying a new car more affordable, so be sure to research what incentives are available for the car you want to buy.

If you decide to consider a used car because of the typically lower price it commands, be sure you know everything about the history of the car, including:

• The number of previous owners
• The car mileage and whether the odometer has been tampered with
• History of accidents or damages
• Whether the car has been stolen, salvaged, or recalled
• The maintenance history of the car

One way you can get this information is by obtaining a CARFAX Vehicle Report. Most reputable car dealerships will give you a copy for free if you ask for it. You can also order the CARFAX report online. Successful used car buyers are just as happy as new car buyers when their research helps them avoid the purchase of a “lemon.”

Another option to consider is leasing a car. To research advantages and disadvantages of this option, visit consumer guide sites like: LeaseGuide.com or howstuffworks.

Arrange for FinancingThe only way to avoid monthly payments and the interest charged to finance a car is to pay cash. However, many of us do not have extra money in our bank accounts for such a large purchase. The next best option is to wait until you have a sizeable down payment. Accumulating a down payment will help you in two ways: 1) it reduces the amount you will need to finance, and 2) you will pay less interest over the long term. If you are in need of a car right away, 100% financing is usually available.

We recommend that you arrange for financing before you visit the dealership. Compare interest rates at several banks and credit unions. If you are not already a member, consider joining a local credit union. They typically offer car finance loans with lower interest rates than regular banks. Automakers may offer attractive financing terms, but make sure you qualify for them. They are typically for people who have excellent credit or they are only introductory rates – so read the fine print. Another benefit of having your own source of financing is that it also tends to make it easier for you to negotiate your new car price.

The Federal Deposit Insurance Corporation (FDIC) recommends that you be careful about how much and for how long you finance your car. In general, the shorter the financing period, the better it is for you because you are paying less in interest charges. For example: If you buy a car priced at $20,000, financed with a 6% interest rate, for 36 months you will pay a total of $1,904 in interest alone. Thus, the total cost of the car is the base price plus the interest for a total of $21,904. On the other hand, let’s suppose that you agree to lower payments so that you can afford a car that is not within your budget by financing the loan over a longer period, let’s say 60 months (five years). At the same interest rate, you’ll pay $3,200 in interest, raising the total cost of the car to $23,200—which is $1,300 more than the 36-month financed option. A few other financing considerations to keep in mind are:

• If you are a recent college graduate or are newly employed, don’t apply for a car loan until you have been at your new job for at least 6 months.
• Don’t apply if you have moved in the last 6 months.
• Pay off your credit card balances as much as possible.
• Get a consistent job with a consistent paycheck. Lenders typically charge higher interest rates for self-employed individuals.
• Other examples of credit extended to you and paid off should appear on your credit report.
• Don’t apply for a car loan for at least 3 years after a bankruptcy.
• Don’t keep a high debt load or high credit card balances.

Consider your Insurance and Warranty OptionsToday, you must have car insurance. Get a variety of car insurance quotes on your specific make, model and year of car before you buy so you can avoid surprises that may blow your budget. For example, a young man purchased a 2008 Mustang and discovered his insurance was $2,400 per year (or $200 per month) on the car! Insurance payments are part of your monthly cost of ownership. Auto insurance sites such as those provided by Comparison Market, Allstate, 21st Century Insurance and GEICO may give you free online auto insurance quotes.

You must also shop for extended warranties before you by your car so you can compare them with the dealer’s warranty pricing. You may be able to find an online, free extended warranty quote (for example, a quote provided by Warranty Direct). A dealer may lower its warranty price to compete with the online offer you have in hand.

Finding the Car you WantBy now you should know what car you want, including the make, model, trim, options, and color. The next step is finding that car at the price you are willing to pay for it. Most cars have multiple options that you can choose from, but dealerships may not carry every car with all of the available options. So, if you want to get the best deal for your car, you will need to be flexible. It might be best to decide which options you are willing to forego before you head to the dealership. You can begin shopping for your car by sending Email inquiries to dealerships that have Internet departments. Don’t forget to ask friends and family members for suggestions and recommendations based upon their car buying experiences. If you are a member of Costco or Sam’s Club or similar clubs, research their auto programs as well.

Negotiate the PriceOnce you have completed your research and arranged your financing, you are ready to buy your car. Don’t be alarmed by the sticker price. Your goal should be to pay a price that is between the sticker price and the invoice price. If you have a trade-in, do not share this information until you have negotiated a fair price for the car. Dealerships have been known to inflate the price of the trade-in, and then recoup the cost on the price of the new car you are buying. Insist on a separate quote for the trade-in value and the cost of the new car, which will allow you to clearly understand the cost of the new car and the value of your trade-in. If the salesperson refuses, go to a different dealership. You can also check the value of your trade-in at kellybluebook or edmunds.com.

Avoid the Five Biggest Car Financing Mistakes

1. Not Researching your Options - Review the terms of your car loan very carefully and make sure you understand them. Obtain different bids from dealers, manufacturers, banks, online lenders and credit unions. Some won’t require very high credit scores but may offer you higher interest rates and less favorable terms. Remember to comparison shop prior to committing to financing.
2. Going by the Monthly Payment Alone – Don’t be “sold” by the monthly payment amount. If the dealer stretches the monthly payments out long enough, any car becomes affordable. The end result is paying an outrageous amount for the car, which is money that could have been used to increase your wealth and financial position. Also determine if there will be early payoff fees, penalties, or hidden fees or charges to process your loan, before you sign any loan agreement.
3. Going by Interest Rate Alone – Remember to look at the trade off between the interest rate and the down payment. If you take a slightly higher interest rate, the down payment may decrease significantly, making the car more affordable if you do not have a large down payment. But, you’ll ultimately pay more for the car in the long run. So, consider saving up funds for the down payment before you go shopping. A good rule of thumb is to have approximately 15% to 20% of the total purchase price of the car as a down payment. You may consider setting up a separate savings account for the car and contributing to it monthly until you reach your goal and let your money talk at the negotiating table!
4. Not Reviewing your Credit Score Before Buying – Your credit score determines your interest rate and whether or not you can qualify for an auto loan. To find out what your credit score is, you can get a free copy of your credit report annually from annualcreditreport.com. For a fee, you can also get a copy of your credit report from one of the three major credit reporting bureaus: Experian, Equifax, or TransUnion. Update any information that is incorrect. A credit score of 690- 720 is considered good. If your credit score is low, consider waiting awhile and cleaning up your credit before you buy a car. Did you know that moving often, skipping payments, or having too much credit lowers your credit score? Pay off unpaid debts if necessary and repair your credit if needed before you buy the car. A few points on your credit score can be the difference between you qualifying for a 5% and 9% annual percentage rate on your loan.
5. Stretching Yourself too Thin – As a rule of thumb, your car payments (for all cars you own) should not exceed 10-12% of your gross monthly income. Auto financers consider multiple cars financed by one person a high risk and will charge you a higher interest rate.

Although some of the car purchasing terminology may seem confusing at first, you can break it down. Ask questions and do your homework. Then, buying a car will be a smooth transaction and will result in the car you needed at the right price. Buying a car is a big investment, but it can be exciting and rewarding, especially if you feel like you got the right car at a fair price. Your car is out there waiting for you!

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