What You Should Know Before You Finance Your First Car
Picking out your first car is fun and liberating. Paying for your new car is quite the opposite. But while you’re shopping, it’s important to remember those payments. Your new car and monthly obligation may not leave your side for the next five years. Choose wisely.
Here are some things you should know before you finance your first car.
1. Your needs may change
You may have your eye on a sporty 2-door coupe, but will that car still make sense in 5 years? No one is suggesting you get a station wagon in your 20s for a potential family you may have in a decade, but you should think about whether your needs may change.
How close are you to having kids? If you’re thinking it’s within the next year or two, you may want to go for the sensible option instead.
Even if you’re never planning on being a family guy, your needs may still change. Are you planning to live abroad? Or maybe your 5-year plan includes a boat that you’ll need to haul.
When you’re planning to make payments on something for the next five years, it should be able to meet your needs for the same timeframe. Of course, there’s always the trade-in option for unforeseen changes, but it’s smarter to plan in advance. Most people lose money on trade-ins.
2. Be realistic
Is your dream car a Miata, but you live in the mountains of Colorado? Do you commute 2 hours every day and have your eye on a gas-guzzling F250? You may have pie-in-the-sky dreams, but it’s time to reel yourself back to reality. Get realistic about your needs and goals. Your dream car will quickly become a nightmare if the conditions aren’t right.
3. Budget for the long-term
Financing a vehicle is a commitment that typically lasts about five years. Think about where you are now (financially) and where you might be then. If you’re still living with your parents, be careful about maxing out your budget. You’ll soon have rent or mortgage expenses in addition to this car payment.
And don’t forget about all the other costs that go along with car ownership. While you’re thinking about how much car you can afford, consider gas, oil changes, new tires and other unexpected expenses.
A good rule of thumb is to take 10 percent of your gross monthly income and subtract your monthly insurance premium. So, if you’re gross salary is $5,000 per month and your insurance premium is $150, you can afford a $350 car payment. Keep in mind that this is just a guideline and it may not work for everyone. If you’re strapped with debt, for example, you may want to max out at a $200 car payment based on the same salary.
4. Insurance varies based on your car choice
If you’re new to car ownership, you may not know that insurance premiums can vary drastically based on the car you choose. This is why insurance premiums should always be a factor in your car buying decision. You may think the rate variances will be obvious, but that’s not always the case. Insurance companies base their rates on many factors, including color, make, model, safety features and likelihood of theft.
Your best bet is to narrow the decision down to thee to five choices and talk to an insurance agent. You may be surprised to learn which vehicles cost more to insure.
5. Know your credit worthiness
Use a free service like Credit Karma or Credit Sesame to check your credit score before you even apply for a car loan. Both services have a feature that recommends lenders based on your score. You don’t have to go this route, but it may help you avoid rejections if your score is low. Keep in mind that you’ll likely pay above prime interest rates if your credit needs work. If your credit is very poor, you may want to hold off on that new car while you improve your credit.
6. You’ll need a down payment
Unlike buying a house, you don’t always need to put money down when you buy a car. It is, however, a good idea. If you can afford to invest a little money upfront, you can lower your monthly obligation. Lower monthly payments are always welcome, but they will especially come in handy if you fall on hard times.
Here’s a good rule of thumb: For every $1,000 you put down, you may drop your monthly car payment by about $20).
7. You don’t need a loan from the dealer
Sometimes, car dealerships can get you the best rate. They are highly motivated to sell cars, so they’ll do what they can to earn your business. But if your credit is fair or poor, you can probably find a better deal elsewhere. Either way, it helps to know what your credit qualifies you for before you step on to the car lot. This way, you aren’t at the mercy of one lender.
When you apply for a car loan before you visit the dealership, you’ll also know how much car you can afford. This way, you’ll avoid getting sold on a car that’s out of your budget.
8. Get the real market value
Unlike car shopping of yesteryear, we have a seemingly endless array of comparison tools at our fingertips. Use Edmund’s, Kelly Blue Book or TrueDelta to narrow down your search. Once you’ve landed on a make and model (or a few choices), head on over to TrueCar to see what others in your area have paid. This will give you a starting point for negotiations. You probably won’t want to pay more than the average sale price on the vehicle. Just be sure to build it with all the options you want to get a true price before you start negotiating. And don’t be ashamed to let the car salesperson know that you’re looking at the true market value. They have their tools and expectations, and so do you.
9. Don’t get too attached before the test drive
If you’re a car enthusiast, you may already know exactly what kind of car you want before you even start on this journey. But don’t get too hasty. Just because a car is great on paper doesn’t mean you’re going to love the way it drives. Try not to get your heart set on one vehicle. Instead, choose at least 2 or 3 to test drive. If you love everything about the car, but find the suspension to be tight, you may want to choose a different one. Ultimately, you’ll want a car that’s enjoyable to drive.
Ideally, you’ll set aside one day to test drive all the vehicles on your list. This way, each drive is fresh in your mind. If you must space it out even further, be sure to make a list of what you love and don’t love about each one.
10. Visit different dealerships
You may be able to get a better deal if you’re willing to drive a bit for your new car. Once you’ve settled on the make and model and the price you’re willing to pay, call around to different dealerships to see what they can do. It’s always a good idea to start with the closest dealer, but if you don’t get the right price there, move on to the next.
11. Buy at the right time
When it comes to car buying (and life), timing is everything. But the confusing part is that timing can vary. Car dealers will always give you the best price when their lots are full. Still, there are some commonalities that will help you know when to shop. TrueCar put together a guide to illustrate when you can get the best price on your car. Here are some of the best takeaways:
· Buy on a Wednesday and save an average of 7.4 percent off of MSRP. Monday is the next best day.
· The best day of the year to buy a car is New Year’s Day.
· If January 1st doesn’t work for you, any Wednesday in December is your next best bet. September is the second-best month to buy a new car.
12. You must retain control
When you’re online shopping for a car, you feel like you’re holding the reigns. You’re all powerful, and you’ve got this. But when you go to the dealership, the salesperson might make you feel like a novice. If you feel like you need them, they can retain the power position in this negotiation. Don’t be swayed. It’s your money. Your power.
As you review things like auto trim and financing options, take your time. If you don’t understand something, ask them to repeat it or explain it in a different way. Remember that you’re not stupid for asking questions, but it would be stupid to walk out of there without understanding where your money is going.
If this all seems like a lot to swallow, don’t worry. We’ve all been in your shoes. Just take it one step at a time and do all your homework. You’ll make the right choice and walk away with the keys to a killer new car at a great price. You’ve got this!