Making big financial decisions can have a significant impact on your life. Whether you’re taking out a loan to make a big purchase, like a car or home, or you’re saving to pay for the purchase itself, it’s important to feel ready for the next step. Since a car is a must-have in most areas, giving individuals the opportunity to get to and from work, school and other places, buying a vehicle is a step taken by many adults. Even teenagers often buy their own vehicles after obtaining their driver’s license.
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Whether you are a first time buyer or you’re planning to replace your existing car, check out this guide that outlines what to know before buying a car. You may find helpful insights on how to prepare for a purchase or tips on how to qualify for a better rate if you’re planning to finance your vehicle.
We break down everything you need to know before you buy your next trip, no matter where you plan to buy from or how you plan to make the purchase. This guide includes details on how to choose the best car for your lifestyle and needs, along with information on financing options. Go into your automotive deal feeling confident and ready to tackle the next step.
Make a Budget First
The first step in the car buying process is setting a budget for the purchase. Do this before you start researching makes and models or applying for financing, because it’s important to know how much you can afford before you fall in love with a car that’s out of your reach. Creating a budget looks different depending on whether you’re paying for the car in cash or financing the purchase.
Financing a Car
If you plan to finance your car, you can use an online calculator to determine the monthly payments for different loan amounts. Enter the amount you can afford as a down payment, and use an estimated interest rate based on industry averages. Most financial experts recommend spending between 10 and 15 percent of your take-home pay for transportation, but this budget category includes more than just your monthly payment amount. Also consider insurance, gas, maintenance and parking costs, if applicable, when calculating your total.
Paying with Cash
If you’re paying cash for your trip, you probably have an amount you know you can spend on purchases. When you use the funds you have saved, it is wise to set aside at least a portion of your amount to save for unexpected expenses. Even a new car can experience unexpected problems, such as a flat tire or a broken windshield, so you want to be prepared to pay for those things if they do.
Get Pre-approved for Financing
It’s best to get pre-qualified for financing before you visit a car dealership or start looking for a car. When you have an idea of what you can afford after setting your budget, you can confirm your assessment by getting a pre-approval letter from a lender that shows you qualify to borrow the funds needed to buy. The pre-approval process is usually fairly easy to complete, requiring you to submit information about yourself and your financial situation.
Where to Apply
You can apply for pre-approval with traditional lenders, including banks and credit unions, as well as online-only lenders. Some automotive manufacturers also act as lenders, offering financing options to buyers both new and used car. If you apply with multiple lenders to compare your options, it’s best to do so within a few days to avoid multiple hard inquiries about your credit history.
You can use your preapproval as leverage when shopping for a vehicle. It allows you to clearly show how much you qualify to borrow, so the salesperson will be less likely to steer you toward a more expensive car. You may get a better deal on the car based on your loan approval amount if the salesperson wants to make the sale.
Results and Research Model
You may go into the car buying experience with a specific vehicle in mind, but it’s important to do your research before making a deal. After all, the most expensive vehicle on the lot may have the worst ratings among drivers familiar with its features and performance. Many third-party automotive researchers offer detailed insights into their own experiences with various models, so you can learn the pros and cons of the car you’re interested in buying. If you find that your dream car rates very poorly among drivers, you may want to rethink your decision.
Compare Loan Terms
If you decide to finance your vehicle purchase, don’t just agree to the terms offered by the first lender who pre-approves you. It is important to compare the terms and other elements of a car loan to protect yourself and your financial situation. Also, make an apples-to-apples comparison when looking at various loans. One car loan may show a lower monthly payment because it has a longer term than another, which results in more payments being made. Longer loan terms may also have higher interest rates, so you end up paying more over the life of the loan.
Look at Interest Rates
Another element of vehicle financing that affects your monthly payment is the interest rate you qualify for. Interest is charged as a percentage of the amount borrowed and it is added to the principal in your monthly payment. A higher rate means you pay more to the lender in exchange for the funds needed to buy your trip.
Your Interest Rate
The interest rate you can earn depends on several factors:
- Your credit history
- Loan period
- Your chosen vehicle
- Current economic situation
If you have a low credit score, you may not qualify for a car loan through a traditional lender. Some lenders specialize in second-chance financing, which is available to those with poor or no credit history. Loans offered through these lenders tend to have higher interest rates, so be aware before you agree to the terms.
Conversely, buyers with good to excellent credit can often qualify for low rates. Some car manufacturers offer special promotions that charge 0 percent interest on new vehicle purchases. Compare your options and choose the car loan that offers the best annual percentage rate combined with terms that align with your financial needs and help you save money.
Consider Convert Add
If you already own a vehicle but don’t plan to keep it, you can trade it in to a dealership as part of a new or used car deal, or you can sell it privately. Some dealers will also buy used cars from owners who have no intention of buying from them. Trading in your car instead of selling it offers several benefits. The main benefit is that the trade-in value is usually applied to the total cost of the car you buy, reducing the amount you have to pay in sales tax.
Trading in used cars can also be easier than selling them privately, as you don’t have to interact with potential buyers. Instead, you work with someone at the dealership who makes an offer on the vehicle. If they can offer a reasonable price, it might be worth a trade.
Before you decide whether to sell or trade in your current ride, do some research to find out what it’s worth. The trade-in value of a vehicle is almost always lower than the private sale value, so you may take a hit by choosing to trade it in at a dealer. Compare various scenarios to see what produces the best financial results.
Always Take a Test Drive
Even if you think a certain model is your dream vehicle, take it for a test drive. Every driver has different expectations and desires from their vehicle, and you may find that certain elements of the car are not in line with what you want. If possible, keep the car for a few days and drive it in different places with varying road conditions. Place it where you plan to store your car when it’s not in use to make sure it fits comfortably in the designated space.
Check it out
If you have a trusted mechanic, take the used car to their location for inspection. Experienced automotive technicians can look for signs of damage or poor maintenance that would normally be overlooked by potential buyers. It is better to know if the car has problems before you buy it.
Know What’s Covered
Whether you’re buying a new car or a used model, it’s important to know your rights as a buyer and what might be covered if you have a major problem.
Warranty Coverage on New Cars
Almost all of them new car comes with a warranty that covers the powertrain, as well as a bumper-to-bumper or comprehensive warranty that covers other components. However, this warranty does not cover every component of the vehicle, so find out what is included in the coverage before you buy.
If you buy a used model, it may have remaining warranty coverage, depending on the year and mileage. Some dealers and manufacturers offer extended warranty coverage for an additional fee. In some states, the law protects car buyers who purchase a “lemon,” or a vehicle that develops extensive problems shortly after purchase. By researching your rights and state laws, you can protect yourself if issues arise.
With these tips in mind, you can start the vehicle buying process feeling confident and excited about your new ride. Doing your own research is the best way to avoid problems and maintain a high level of protection.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His byline has appeared in dozens of online financial publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.