Purchasing a car is a big step and can be a large financial commitment. It is often the first major purchase people make as adults. If you’ve decided to buy a car, here are some things to consider to determine if you’re in the best financial shape to make the purchase.
Can You Afford a New Car?
Before buying a new car, assess your ability to afford one.
A good way to test your readiness is to create a monthly budget that outlines how much money you can realistically allocate to monthly payments on a vehicle. Use this figure as a baseline when shopping around, or use an online calculator to help determine how much you can afford to spend on a car.
If you own or lease a car and are making monthly payments, are you making regular payments? If you struggle to make ends meet with your existing auto loan, it’s probably not a good time to purchase a new car.
Consider Your Credit
Dealerships will almost always inquire about your credit history before approving a car loan and offering an interest rate. Knowing your credit standing before starting the process will help you manage your expectations.
All else being equal, the healthier your credit, the lower your interest rate will likely be. If your credit health is questionable, you won’t necessarily be denied a loan, but you will likely have a higher interest rate should you qualify.
If you have a car in mind and a set interest rate for well-qualified buyers is advertised, inquire ahead of time about what the qualifications are to receive the lowest rate. This will help you know where you stand ahead of time, so you aren’t caught off guard at the dealership.
Trading in an Old Car?
Many people trade in their old cars and apply its value towards a new model or entirely new vehicle. Do some research ahead of time. While it may be easiest to one-stop shop, knowing your car’s trade-in value ahead of time will allow you to better negotiate the price of your new car when you’re at the dealership.
As with other large purchases, putting money down up front can help offset your interest rates over time. It shows lenders that you have the financial means to pay for a portion of the car’s sticker price.
When looking at the new car you want to purchase, consider how much money down you can afford. Edmunds reported that, the average car down payment was 10.4% of the car’s total price.
Types of Auto Financing
Most dealerships offer in-house auto-financing. This means that you’ll enter into a contract with the dealership and the bank, credit union or the financial institution they sell their contracts out to – known as assignees. Dealerships are convenient and often have many options for financing, but some may also have higher interest rates.
It’s a little more work, but shopping around for your best auto loan and interest rate ahead of time can save you money in the long run. Securing preapproval for a loan from a bank, credit union or finance company—what’s known as a direct lender—will arm you with an excellent bargaining tool in your negotiations with a dealership.
Short- vs. Long-Term Loans
No matter who loans you the money, you’ll be given a time period in which to repay the funds, plus interest. While it may be tempting to spread out your payments over a longer period of time, extending the term of the loan may raise your interest rate and increase the amount of total interest paid. It’s usually best to opt for the shortest term you can afford.
Cars depreciate in value the moment you sign the dotted line and drive off of the lot. In fact, in a three-year period, new cars are worth nearly 40% less than they were when purchased, according to Edmunds. It’s important to research ahead of time which models retain their value best to make sure you’re investing wisely in your purchase.
If you’re planning on keeping the car for a long time, depreciation may be less of a consideration. However, if you foresee selling or trading the car within a few years, do some calculations to make sure you aren’t going “upside down” on your loan – paying more for your car than you will earn upon its sale.
Purchasing a car is a big investment. Making sure you’re in financial shape prior to hitting the dealerships may be essential to securing the best deal.