Everything You Need To Know About Buying Your First Car
It is a shared experience and, in many ways, a rite of passage: buying your first car. Whether you are seeking transportation for your first real job or replacing the hand-me-down vehicle your parents gave you, your first vehicle purchase can be a laborious and stress-inducing process.
But it doesn’t have to be. With a little preparation and forethought, you will find the right car for you without breaking the bank. If you are a first-time car buyer, use this guide to get the best possible experience.
Finding A Car You Can Afford
Before you start cruising car sale websites or visit dealerships, you first need to determine what, exactly, you can afford, particularly if you plan to finance your purchase. You can’t guess at the monthly payment you can afford. You have to calculate it.
First, make a list of every single expense you rack up in a given month. You might be tempted to only list the easy, big-ticket items, such as rent, utilities and student loan or credit card payments. But you also need to know how much you spend on groceries, takeout food, entertainment and clothes. If you spend $100 a month at Starbucks, you must account for (or reduce) those dollars. And, of course, there is the cost of auto insurance.
Failing to create an accurate monthly budget and stick to it can and will derail your car loan — and, ultimately, your credit score. And while you’re at it, don’t forget to leave room in your budget for savings. It is never too early to start building wealth. A couple hundred dollars a month can add up fast, and if you are buying a used car that has exceeded its factory warranty, it’s a good idea to have an emergency fund for repairs.
Now that you have all your expenses on paper, rank them. Break them into “must-haves” (rent, phone) and “like-to-haves” (premium coffee, cable TV). Put them all in order from most necessary to least. You need to not only know what you’re spending every month but where you can cut back if you need to.
Finally, add up your expenses, determine your total monthly budget, and compare it to your monthly income. You may find you are already spending more than you make. Don’t worry — you’re not alone! But at least you know where you stand, and as a first-time car buyer, that knowledge is powerful. It is easy to be tempted by a vehicle you can’t really afford. Negotiating the price, down payment and monthly payment becomes much easier when the seller knows your budget is fixed.
Many financial experts advise first time car buyers to focus on the total price of the vehicle rather than the monthly payment. That is good advice, to an extent. You should not sign up for an 84-month loan with a high interest rate because it’s the only way to get into the car of your dreams. The long-term cost will probably not be worth it, and you will be out of the market for the next seven years — not an enviable nor flexible position.
But neither should you overextend yourself on the down payment or monthly payment to make an expensive car yours. If you can’t afford it, you shouldn’t buy it. Your focus should be on the total cost to purchase the vehicle over the entire life of the loan.
Don’t fall into the same trap as many of your peers. Stick to your budget, find the vehicle that fits it, and enjoy the serenity and freedom that come with financial security.
Getting Approved For The Loan
If you want a reliable vehicle and you don’t have the cash to buy it outright, you have to decide whether to finance your purchase or opt for a lease.
Leasing a Car
If you are considering leasing, it would be good to read up on how it works. Know that leasing can be a great option if you absolutely must have a new car and can’t afford to buy it. You will drive it for two or three years and, if you make all your lease payments on time, build a solid credit history that will set you up for a competitive interest rate on your next lease or purchase. The main drawback is that, at the end of the lease term, you are left without a car, and you may owe fees for additional miles or excess wear-and-tear.
Financing a Car Purchase
If this isn’t your first big purchase, and you already have good credit built up, then financing might be a better option. This way, you are building equity in the vehicle. When the time comes to replace it, you will be in a better financial position.
If you are financing and want to ensure you get the best possible interest rate – which translates to spending less over the entire life of the loan — one strategy to consider is shopping around a bit. However, don’t just assume that a bank will automatically give you a better finance deal than the dealership; in some cases, the dealership can meet or beat whatever deal a third party can provide. This is because dealers cultivate relationships with a wide range of auto finance sources.
So as a first-time buyer, what should you do? In the week before you plan to buy, it is worth calling a few different banks, finance companies and credit unions to see where you stand (but not earlier, as the credit bureaus will count all credit pulls done in a short period of time once, limiting their impact on your score). Find out how much they are willing to finance you for, and at what interest rates.
Take all that information with you to the dealership. You already know your budget, and you know your best offer, so that should guide your choice of vehicle. But once you get to the financing portion, show your offers to the dealer and ask if they can meet or beat them.
You might be surprised. Those “no money down, zero percent financing” offers you see in car commercials are typically available only through each manufacturer’s “captive” finance company (such as Ford Motor Credit or Toyota Financial Services), and they offer incentives designed to help dealers move units.
Finally, don’t be too quick to turn down the protection products you will be offered in the dealership’s finance (or “F&I”) office. You may not be swayed by windshield or tire protection, but if you are “upside-down” on the loan — meaning you owe more than the vehicle is worth for the first several months you own it — “GAP” (for guaranteed asset protection) is a wise choice; it will cover the difference if your car is stolen or totaled. If you are buying an out-of-warranty used vehicle, a vehicle service contract can protect you against huge repair bills in the event of a mechanical breakdown.
As with every stage of the car-buying process, be deliberate, do your research, and don’t make snap decisions.
Managing Your Car Loan
Once you drive off the lot, don’t get so caught up in the joy of car ownership that you forget to set up the reminders necessary to ensure you never miss a payment.
One of the best ways to protect and build your credit profile is to make every payment in full and on time. This single factor has a massive impact on your score, which in turn is used to determine everything from your ability to open new lines of credit to getting a job or securing the lease on a new apartment. Its importance cannot be overstated.
If you did your homework ahead of time, you already know you can afford your new car, so it’s just a matter of making your payment. Whether that means setting up automatic payments so you never have to worry, or using some other system to remind you, the important thing is to just make sure it gets done.
But what if your situation changes? What if you lose your job, or your budget changes dramatically for some reason? Don’t just ignore it and hope it goes away. Before you miss a single payment, call the bank or financial institution that holds your title and explain the situation.
If you have been in good standing to that point, they may be willing to work with you, whether that means allowing you to miss a few payments without penalties or allowing you to make smaller payments for a few months and add a few months to your term.
All About Refinancing
Finally, what if your fortunes have improved? What if you are making more or your credit has gone up? Auto refinancing may be a good option. Typically, with your first car loan, you only need to wait one year to refinance.
There are a variety of pros and cons to refinancing, but it boils down to, essentially, repurchasing your same vehicle. When you refinance, your refinancing lender will pay off your current loan and set you up with a new one. Borrowers usually refinance to lower their monthly payments, decrease their interest rates and total interest charges, remove someone from their loans, or a combination.
While opening and closing loans every year will hurt your credit, taking the time to reevaluate your car loan every few years to make sure you are getting the best possible deal isn’t a bad idea. Just like when you originally financed the car, don’t spread it out over time — do all your inquiries at the same time, so your credit score isn’t lowered by multiple hits. Use the same due diligence you went through on the original loan, and you could potentially cut your payments by significant amounts, while either shortening, or maintaining, the same length of time.
While it might be tempting to extend the length of your loan when refinancing to get those payments down even further, unless you are in dire financial straits, this likely isn’t a good idea. It will likely increase the total amount you will pay on the loan, to the tune of thousands of dollars more. As always, be sure to compare the monthly cost as well as the total cost of the loan.
Buying your first car can be exciting, terrifying, exhilarating and frustrating. But with a little preparation and thought, you can make sure that whatever car you choose as your first, you won’t have to worry about whether or not you’ve fallen in love with something you can’t afford. Now all that’s left is to hop in, crank up the stereo, and enjoy the ride!
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