Buy new, buy used, or lease? These are just a few of the many decisions you’ll need to make before happily driving away with a vehicle. While shopping for a car or truck is exciting, it is also no simple matter. You can avoid buyer’s remorse by making important financial and practical decisions before signing on the dotted line.
By reviewing the pros and cons of buying and leasing, how to analyze and determine your personal requirements, how to get the best purchase price and financing deal, and the laws that protect your rights as a consumer before you shop, you can be sure to make the right choice.
What’s Right for You?
Shopping for a car can be complicated and time-consuming. It involves balancing your desires with your economic reality, deciding whether to buy or lease, and knowing what is the best deal for you. To make the process efficient and improve your chances of driving away happy, you will need to consider:
• Your Needs – Think about your transportation requirements. Does your car need to be large enough for a family of five, or small enough to fit in tight city parking spaces; tough enough to haul firewood, or chic enough to drive clients around?
• Your Wants – Your desires certainly play a part in the car buying decision. Make, color, options, and style are all important to being happy with your final choice. Read car magazines and websites for ideas.
• Your Spending Plan – It is easy to get carried away and end up with a car that is out of your price range and a monthly payment beyond your capacity. Your spending plan, not a salesperson’s opinion, should dictate your decision. Review your income and expenses to see what you have available each month for auto expenses.
Save For a Down Payment or Total Car Cost
While it is possible to buy a car with no money down, you will end up paying a lot more for it if you do so. The more you borrow, the more the car will ultimately cost.
To decrease the amount you finance, it is wise to make a significant down payment. With enough savings, you may be able to purchase a car outright (typically an option when buying a used car, rather than a new one).
Effective saving begins with first determining how much you want to save, then setting a reasonable date to achieve your goal. Using an automatic deduction can make the process easy. You can arrange with your financial institution to have a set sum deducted from your checking account and automatically deposited into savings.
New, Used, or Lease: Advantages and Disadvantages of Each
After you determine how much you can afford to spend, the next step is to decide between buying new, buying used, or leasing. It is important to be familiar with each option’s positive and negative aspects.
While leasing a car may enable you to get “more car” for less money each month than what you might be able to purchase, it is important to remember that leasing means renting. When the term of the lease is up, you return the car. At that point, you have the option of paying any outstanding fees for mileage or damage, or purchasing the car outright. Often, you will pay more over time by leasing and then purchasing than you would have had you simply bought the car in the first place. If, during the course of the lease contract, you choose to return the car, very high penalties will likely apply.
Credit Reports and Credit History
Your credit history will have a serious impact on the interest rate you will be offered. The better your credit score, the better rate you will be eligible for. Other factors, such as length of employment, income, and expenses may also be considered when determining the type of financing you may qualify for.
If your credit report isn’t perfect, you may consider having someone with good credit co-sign the loan for you. Be cautious about using this option though, as the cosigner assumes equal responsibility for the repayment of the loan. Any late or missed payments will appear on each of your credit reports.
Some financial institutions may offer special loans for first-time buyers. These may enable you to get a loan at a reasonable rate even if you have a limited credit history.
Financing Options and Implications
Because financing increases the total cost of the car, the loan you get is very important. Make sure you understand the following aspects of the loan agreement before you sign any documents:
• Exact price you’re paying for the vehicle
• Amount you’re financing
• Finance charge
• Annual percentage rate (APR)
• Number and amount of payments
• Total sales price
Shop for the Best Deal
The total amount you will pay for your car depends on its price, the annual percentage rate (APR), and the length of the loan. When shopping for the best deal:
• Don’t be fooled by an advertised low monthly payment – if the length of the loan is long and the interest rate high, you will be paying more than you may have to.
• Be wary of extremely low promotional APRs. Though you may qualify for particularly low rates by making a large down payment, it may be more affordable to pay higher financing charges on a car that is lower in price or to buy a car that requires a smaller down payment.
• Look for manufacturer’s incentives. Dealers may offer cash back on specific models.
Beware zero-percent financing
Zero percent financing sounds like an amazing bargain – after all, how can you beat a no interest loan? Often, you can. Such “deals” frequently come with inflated prices for extended warranties and loan insurance, high application fees, and pre-payment penalties. And because you forfeit the rebate option, you end up paying a higher price for the car. You may also be required to repay the car in three years or fewer – resulting in a very high monthly payment.
Zero percent financing can be elusive. It is only offered to those with very good credit, as determined by the lender. And it is often not available for the most popular cars and trucks.
Dealer and Finance Company Loans
At an auto dealership, you will be encouraged to use dealer financing. While not all dealer loans are bad, in most cases a loan from your financial institution will be preferable.
Never walk onto a car lot unprepared. Before you go, you should already know:
• The model you want
• The options you are looking for
• Your transportation needs
• How much you are willing to spend
• How much you can afford to finance
• How much you can spend on a monthly payment
Gain a good understanding of price, models and features by conducting research using car-buying magazines, books, and the Internet. Be sure to compare models and prices in ads and at dealer showrooms. Visit your financial institution before you shop, so you can seek your vehicle armed with the knowledge of how much you can spend.
To get the best price on your new car, you will often have to negotiate with the salesperson. Developing your bargaining skills will be worth it to you in the end, as it can often save you 10 to 20 percent of the advertised price. You may be able to negotiate a particularly good price on overstocked or less popular cars.
But remember – a deal isn’t a deal if you end up with a car you don’t really want. Sometimes ordering a car will save you more money then negotiating for one on the lot, as you won’t be paying for unnecessary options.
Trade In Your Old Car
If you already have a vehicle, you will likely be selling it and using the profit to pay for all or part of your new car. To get the best price, make sure you know your car’s worth. Check reference books or the Internet to know its value (try www.kbb.com and www.nada.com). After that, you have two options:
• Sell the car yourself. You will usually get the best price this way, but will have to allow for the time it takes to sell, as well as the effort of placing the ad, talking to and seeing a lot of people, and negotiating with buyers.
• Trade-in to the dealer. This is often the easiest option, though typically not the best deal. To ensure you get the most from a trade-in, do so only after you’ve negotiated the best possible price for your new car.
Save On Car Insurance
Car insurance premiums (monthly payments) can be a substantial expense. However, you can improve your chances of getting the best deal.
• Improve your credit score. Insurers may use your credit score to determine the premium. Pay down excessive unsecured debt, pay off collection accounts, and pay your current financial obligations on time, every time.
• Establish long-term residence or become a homeowner – both connote responsibility.
• Avoid tickets, particularly moving violations. Attend traffic school if you can’t.
• Lower your coverage amounts and/or increase your deductible. If you are a careful driver with a good driving history, it may be worth the risk.
• Buy a used car – premiums are cheaper.
• Avoid 4-wheel drive and high performance cars, which often carry higher premiums.
• Compare prices from local and national companies.
Leasing and Lending Laws
The following federal laws protect your rights as a consumer.
Truth in Lending Act – Requires creditors to provide written disclosure of APR, total finance charges, monthly payment amount, payment due dates, total amount being financed, length of the credit agreement, and any charges for late payments.
Federal Consumer Leasing Act – Requires the leasing company to disclose the total amount of the initial payment, the number and amounts of monthly payments, all fees charged, annual mileage allowance, whether the lease can be terminated early, whether the car can be purchased at the end of the lease, the price to buy at the end of the lease, and any extra payments that may be required at the end of the lease.
Credit Practices Rule – Requires creditors to provide a written notice to potential co-signers of their liability if the other person fails to pay.
Equal Credit Opportunity Act – Prohibits discrimination related to credit because of gender, race, color, marital status, religion, national origin or age.
Federal and State Agencies
• Federal Trade Commission, (877) 382-4357; www.ftc.gov
• Federal Reserve System, 888-851-1920; www.federalreserve.gov
• Better Business Bureau, (703) 276-0100; www.bbb.org
• Some state laws may provide you with additional rights. Contact your state’s consumer protection agency or Attorney General’s office (www.naag.org).