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Tips on How to Buy a New Car
If you are
considering buying a car for the first time, you might not know where to begin.
Making such a major purchase is most likely the first step in your financial
life, so it is very important to take it seriously. Chances are, if you’re
planning to buy a car or truck, you’re one of the overwhelming majority of car
buyers that do their homework in advance of ever taking a test drive. You learn
about options, colors, prices, and ratings. But would you think to check your
credit score and research financing options with the same intensity? You should.
Your dealership or an auto
lender will work with you to help you determine a financing arrangement that
makes sense for you. But it’s always a good idea to have a solid game plan on
financing before you ever set foot in a dealership.
Your Financial
Situation
Evaluate your financial situation and determine how much you can afford to pay.
Do you have a budget? If you don’t already have one, now is the time to create
one. This will help you determine how much car you can actually afford (to
estimate a monthly payment for the car itself, check out our payment
calculator). Don’t forget to factor in vehicle-related costs outside of the car
payment, such as insurance costs. Insurance premiums for younger drivers can be
significantly higher – sometimes as much as the monthly car payment itself.
Other costs to consider include gas, maintenance, and taxes, which can all be
significant, especially if you forget to plan for them.
If you are jointly financing
your automobile and one of you has excellent credit while the other is credit
challenged, understand how the finance company determines your annual percentage
rate (APR). For example, some finance companies will only judge a couple’s
credit worthiness based on the better qualified applicant. With a good payment
history, this could present a good opportunity to help the credit challenged
spouse improve their credit history over time. Other finance companies, however,
may determine your APR based on both applicants, in which case you may want to
consider applying for credit only in the name of the more credit-worthy borrower
to secure a lower APR.
Before financing or leasing a
vehicle, make sure you have enough income to cover your current monthly living
expenses. Then, finance new purchases only when you can afford to take on a new
monthly payment. The “Monthly Spending Plan” is a tool to help determine an
affordable payment for you.
The only time to consider
taking on additional debt is when you’re spending less each month than you take
home. The additional debt load should not cut into the amount you’ve committed
to saving for emergencies and other top priorities or life goals. Saving money
for a down payment or trading in a vehicle can reduce the amount you need to
finance. In some cases, your trade-in vehicle will take care of the down payment
on your vehicle.
How Good is your
Credit?
Have you pulled your credit report? Your credit history may affect the finance
rate you are able to secure, so it’s a good idea to get a copy of your free
credit report before heading to the dealer. This way, you’ll know what creditors
will see before they do. And it will give you a chance to try to correct any
errors on your report.
How much should you
pay?
Firstly, stay within the price range you can afford and research the pricing of
your car to determine a realistic price range for the car you are thinking of
buying. Have you shopped around? Do some homework before you decide which car to
buy and where to buy it. Call your bank or credit union. Talk to multiple
dealerships. Print out all quotes and keep them in a folder that you bring with
you when you shop for the car. In the end, however, whether you finance through
your dealer or elsewhere, there are typically no penalties to refinance if
you’re not satisfied.
Getting Financed
Do you know how finance rates are determined? Vehicle financers use a number of
factors to determine the finance rate they’ll offer you. Typically, they review
your credit score, which is based on an automated analysis of your credit
history. Other factors that may affect the financing offer include: the price of
the vehicle you’d like to purchase, the availability of manufacturer incentives,
the amount of your down payment, your debt repayment options, and the length of
the finance contract. The rate you’re offered may be negotiable. Always, compare
annual percentage rates and financing terms from multiple sources such as banks,
finance companies, and credit unions.
There are literally hundreds of
thousands of sources of financing for automobile purchases, such as banks,
credit unions, financing companies, savings banks, loans from stock brokerage
firms, and home equity loans. This has created a highly competitive marketplace
and lower rates for all consumers.
In some cases, buyers use
“direct lending:” they obtain a loan directly from a finance company, bank or
credit union. In direct lending, a buyer agrees to pay the amount financed, plus
an agreed-upon finance charge, over a period of time. Once a buyer and a vehicle
dealership enter into a contract and the buyer agrees to a vehicle price, the
buyer uses the loan proceeds from the direct lender to pay the dealership for
the vehicle. Consumers also may arrange for a vehicle loan over the Internet.
The most common type of vehicle
financing, however, is “dealership financing.” In this arrangement, a buyer and
a dealership enter into a contract where the buyer agrees to pay the amount
financed, plus an agreed-upon finance charge, over a period of time. The
dealership may retain the contract, but usually sells it to an assignee (such as
a bank, finance company or credit union), which services the account and
collects the payments.
For the vehicle buyer,
dealership financing offers:
1. Convenience – Dealers offer
buyers vehicles and financing in one place.
2. Multiple financing
relationships – The dealership’s relationships with a variety of banks and
finance companies mean they can offer buyers a range of financing options.
3. Special programs – From
time to time, dealerships may offer manufacturer sponsored, low-rate
programs to buyers.
How the process works
Most dealerships have a Finance and Insurance (F&I) Department, which provides
one-stop shopping for financing. The F&I Department manager will ask you to
complete a credit application. Information on this application may include: your
name; Social Security number; date of birth; current and previous addresses and
length of stay; current and previous employers and length of employment;
occupation; sources of income; total gross monthly income; and financial
information on existing credit accounts.
The dealership will obtain a
copy of your credit report, which contains information about current and past
credit obligations, your payment record and data from public records (for
example, a bankruptcy filing obtained from court documents).
For each account, the credit
report shows your account number, the type and terms of the account, the credit
limit, the most recent balance and the most recent payment. The comments section
describes the current status of your account, including the creditor’s summary
of past due information and any legal steps that may have been taken to collect.
Dealers typically sell your
contract to an assignee, such as a bank, finance company or credit union. The
dealership submits your credit application to one or more of these potential
assignees to determine their willingness to purchase your contract from the
dealer.
These finance companies or
other potential assignees will usually evaluate your credit application using
automated techniques such as credit scoring, where a variety of factors, like
your credit history, length of employment, income and expenses may be weighted
and scored.
Since the bank, finance company
or credit union does not deal directly with the prospective vehicle purchaser,
it bases its evaluation upon what appears on the individual’s credit report and
score, the completed credit application, and the terms of the sale, such as the
amount of the down payment. Each finance company or other potential assignee
decides whether it is willing to buy the contract, notifies the dealership of
its decision and, if applicable, offers the dealership a wholesale rate at which
the assignee will buy the contract, often called the “buy rate.”
Do I need a co-signer?
Is there someone you could ask to be a co-signer if needed? If you’re under 18,
are currently not employed, do not have a credit history, or your credit history
is not good, you may need a responsible person to co-sign the finance contract
for you.
You may be allowed by the
creditor to have a co-signer sign the finance contract with you in order to make
up for any deficiencies in your credit history. A co-signer assumes equal
responsibility for the contract, and the account history will be reflected on
the co-signer’s credit history as well. For this reason, you should exercise
caution if asked to co-sign for someone else. Since many co-signers are
eventually asked to repay the obligation, be sure you can afford to do so before
agreeing to be someone’s co-signer.
Sealing the deal
Negotiate your finance arrangements and terms just as you negotiate the price of
the vehicle. Understand the value and cost of optional products such as extended
service contracts, credit insurance, or guaranteed auto protection. If you don’t
want these products, don’t sign for them. Always take the time to read the
contract carefully before you sign it and ask questions about anything you don’t
understand.
Your dealer may be able to
offer manufacturer incentives, such as reduced finance rates or cash back on
certain models. You may see these specials advertised in your area. Make sure
you ask your dealer if the model you are interested in has any special financing
offers or rebates.
Generally, these discounted
rates are not negotiable, may be limited by a consumer’s credit history, and are
available only for certain models, makes or model-year vehicles. When there are
no special financing offers available, you can negotiate the annual percentage
rate (APR) and the terms for payment with the dealership, just as you negotiate
the price of the vehicle. The APR that you negotiate with the dealer is usually
higher than the wholesale rate described earlier. This negotiation can occur
before or after the dealership accepts and processes your credit application.
Do you really know everything
there is to know? Do you know the difference between leasing and financing? Know
what an APR is? Credit insurance? Guaranteed Auto Protection? You need to
educate yourself on these terms, and understand the value and price of
aftermarket products. If you don’t want something, don’t sign for it. See the
NADAguides.com Auto Loan Glossary to define these terms.
After the purchase
Make your payments on time for late or missed payments incur late fees and
appear on your credit report, which can impact your ability to get credit in the
future. If you financed the vehicle, be aware that the bank, finance company or
credit union that bought the financing contract from the dealership holds a lien
on the auto title (and in some cases the actual title) until you have paid the
contract in full. If you have difficulty making your monthly payments, talk to
your creditors. Work out a repayment schedule and, if necessary, seek the
services of a non-profit credit counseling agency. If you default, a creditor
may take the auto in full satisfaction of the credit agreement or may sell the
auto and apply the proceeds from the sale to the outstanding balance of the
credit agreement. Be aware that repossession can occur if you fail to make
timely payments. It does not relieve you of your obligation to pay for the auto.
The law in some states allows the creditor to repossess the auto without going
to court.
What about Leasing a
car?
If you are considering leasing, there are several things to keep in mind. The
monthly payments on a lease are usually lower than monthly finance payments on
the same vehicle because you are paying for the vehicle’s expected depreciation
during the lease term, plus a rent charge, taxes, and fees. But at the end of a
lease, you must return the vehicle unless the lease lets you buy it and you
agree to the purchase costs and terms.
To be sure the lease terms fit
your situation: Consider the beginning, middle and end of lease costs. Compare
different lease offers and terms, including mileage limits, and also consider
how long you may want to keep the vehicle.
When you lease a vehicle, you
have the right to use it for an agreed number of months and miles. At lease end,
you may return the vehicle, pay any end-of-lease fees and charges, and “walk
away.” You may buy the vehicle for the additional agreed-upon price if you have
a purchase option, which is a typical provision in retail lease contracts. Keep
in mind that in most cases, you will be responsible for an early termination
charge if you end the lease early. That charge could be substantial.
Another important consideration
is the mileage limit – most standard leases are calculated based on a specified
number of miles you can drive, typically 15,000 or fewer per year. You can
negotiate a higher mileage limit, but you will normally have an increased
monthly payment since the vehicle’s depreciation will be greater during your
lease term. If you exceed the mileage limit set in the lease agreement, you’ll
probably have to pay additional charges when you return the vehicle.
When you lease, you are also
responsible for excess wear and damage, and missing equipment. You must also
service the vehicle in accordance with the manufacturer’s recommendations.
Finally, you will have to
maintain insurance that meets the leasing company’s standards. Be sure to find
out the cost of this insurance.
It is crucial to be vigilant
about understanding the vehicle financing process, especially if you are at the
beginning of your financial life. If you make mistakes along the way, they can
follow you for years. Get smart before you sign on the dotted line.
Step 1: Do your Homework
Before you set foot in any new car dealership, do your
homework. Determine the type of vehicle that best fits your needs, your wants
and your lifestyle. Many sites offer a comprehensive New Car Information Center
to help you choose your ideal ride, including a side-by-side comparison tool to
let you compare up to four different vehicles simultaneously -- a convenient
alternative to visiting a variety of different manufacturer's websites.
Additionally, you can research safety information, read expert reviews, and
build and price vehicles by choosing the make, model, colors and options that
interest you most. Research virtually every aspect of every new vehicle available on
the market.
Step 2: Check your Wallet
Next up -- determine your budget and stick to it. If
you're financing a car, find out exactly how much you can afford to spend on a
monthly basis. Again, many sites offer a wealth of vehicle pricing
resources to help you do the math as well as a Credit Check service to determine
what type of credit you have and what type of loan you could qualify for. Don't
forget to factor in any down payments or trade-in allowance (if you have a used
car you're trading towards the purchase of a new car, be sure to check the
trade-in price) and be sure to research any Current Offers available for the car
you want to buy, if applicable. Current Offers are manufacturer-to-consumer
incentives and rebates (and in many cases dealers also offer their own
incentives) that ultimately reduce the car's overall purchase price. Also, be
sure to determine the price of the exact features and options you want ahead of
time since many options and add-ons will increase the amount of money you'll
spend. Or not.
Step 3: Get a Quote
Now it's time to get a price quote from a local dealer.
The most convenient way to obtain a quote is to submit a new car purchase
request online at a dealers site. This request is then routed to a local dealer
in your area who can provide you with a quick and easy price quote over the
phone or via email, depending on your preference. Be sure to ask the dealer if
the vehicle you're interested in buying is available at the dealership ahead of
time. If the dealership doesn't have the car in inventory, they might be able to
locate the car for you. Then again, they might not. You just never know.
Step 4: Take a Test Drive
No amount of online research can replace the experience
of an actual, physical test drive, so be sure to take that new car for a spin.
You can test drive new vehicles at a local car dealership, you could ask a
family member or friend who owns a similar vehicle to take their car for a ride,
or you could rent a similar car with similar options for a day or two and spend
some quality time examining and driving it before you make your final decision.
A test drive is extremely important, so take the time and do it right.
Step 5: Get the Best Price
If you get a reasonable price quote for your car (with
tax, license and other applicable fees), one with an affordable monthly payment
and one that includes incentives and rebates that make the deal even sweeter,
it's time to sign on the dotted line. If you think there's some wiggle room
between what the dealer is asking and what you're willing to pay, however, don't
be afraid to negotiate. Depending on the vehicle, a dealer may be willing to
negotiate a lower final sales price. Next, be sure to discuss financing if
needed. Consider securing a loan at the dealership or research other financing
options, such as programs offered by banks, credit unions or other independent
lenders. Finally, if you're trading in a used car for credit towards the
purchase of your new car, be sure to research its value at Kelly Blue Book prior
to the negotiation process. Obviously, any credit for your trade-in coupled with
any down payment you make will ultimately reduce the car's overall purchase
price.
Portions of this were provided by Americans Well-informed on Automobile
Retailing Economics (AWARE) |
