Getting preapproved for an auto loan helps you set a realistic budget for your car purchase since you know how much you can borrow and at what interest rate.
Your purchase price should be less than what you’re actually approved for because you’ll need to reserve about 10% of the loan amount for taxes and fees. You’ll also want to consider down payment and trade-in amounts that offset the purchase price.
With all of this information, use an auto loan calculator to estimate your monthly payment. You can then make sure your car payment will fit into your budget, and if it doesn’t, you can look for a less expensive car.
Dealer Financing
You buy and finance the car all at once through a car dealership. Dealers offer special rates to get rid of overstock in their inventory, especially at the end of a car model year.
Bank Financing
You can usually get a lower interest rate at a bank than at a dealership, especially if you are an existing bank customer. Many banks require a 10–20 percent down payment to cover the depreciation of the car in case you default on your loan and they need to repossess your car.
Credit Unions
Credit unions may have lower overhead costs than banks, allowing them to offer lower auto loan rates.
Trade-In
If you already own a car, then you can trade it in for a discount on a new vehicle. If your old car is in good condition with relatively low mileage, you may be able to use it toward a down payment.
Internet
Shop for car loans online to get quick approval and easily compare prices.
Buying a New Car
As soon as you drive a new car off the dealership lot, it then becomes a used car and its value continues to decrease. While the value of your car drops immediately and will continue to depreciate over time, what you owe on your loan drops more gradually. If you owe more money for your car than what you can sell it for, then you have negative equity.
You can avoid losing money from your negative equity by following these simple tips:
- Buy a car that you can afford. If your auto loan payments are too high, you may decide to sell the car before it's been paid off completely.
- Keep your car until it is paid off completely.
- Pay off your loan sooner by choosing a shorter loan or overpaying the monthly amount, if allowed.
- Make the largest down payment you can. This will help offset the effect of depreciation and start giving you some positive equity.
Buying a Used Car
Buying a used car allows you to avoid the value depreciation that comes with buying a new car. Since no two used cars will be exactly alike, take some time to research your choices carefully.
Here's a step-by-step checklist of precautions that you can take as you shop around:
- Vehicle value. Look up the Kelly Blue Book value of the car so you know what price range to start in.
- Maintenance history. Request the car's maintenance history from the seller. Knowing if the car was used for long commutes, on cross-country road trips or in harsh weather conditions will help you learn more about the wear and tear of the vehicle.
- Vehicle history. Get the vehicle history report (VHR) using the vehicle identification number (VIN). It will cost about $10–$15, but this report will let you know if the car has been in any major accidents that may have weakened the frame.
- Test drive. When it comes time for the test drive, be relentless and thorough. Ask the seller about any strange noises the car makes or any problems with acceleration, suspension, downshifting, braking, steering and handling. Make sure you are comfortable driving the car and that it's easy for you to navigate on the road.
- Mechanic evaluation. Test everything in the car. Press every button. Open every window. Open and close every door. Once you are fairly sure there is nothing wrong with the car, get a professional mechanic to double-check. Subtract any small issues with the car from the price you are willing to pay for the vehicle. Otherwise, you'll have to pay for these repairs on your own.
Leasing a Car
Instead of buying a new or used car, another option is to lease a new car for monthly payments. A lease is a contract in which a new car is loaned to you for a specified time period, ranging from six months to five years. If you want to have a new car every few years, then leasing might be the way to go; however, it may cost more than purchasing a car in the long run. Vehicles can be leased from a dealership. After successfully negotiating a deal, signing a contract and making a down payment, you will commit to a monthly payment that will cover the cost of the car’s depreciation.
Your monthly lease payment is determined by five important numbers:
- Lease Term – How long you’ll be leasing the car.
- Lease Residual Value – An assumption of what the vehicle will be worth at the end of the lease term.
- Money Factor or Lease Fee – An alternative way to express the amount of interest on a car lease. Money factor x 2,400 = annual percentage rate (APR).
- Miles Driven Per Year – The average number of miles you expect to drive each year during the lease term.
- Acquisition Fee – A fee to cover a leasing company’s administrative costs.
Leasing can sound like an interesting way to experience a variety of cars, but be aware that leasing contracts come with many conditions. Some examples:
- If you buy the car that you leased, the cost of the lease combined with the purchase price of the car is often much more than the price of the car when it’s new.
- Deciding you want to end a lease early means you'll have to pay the remainder of the lease plus any termination fees.
- Any wear and tear on the car, including scratches and dings, means you’ll have to pay to fix anything that decreases the resale value of the car.
- If your mileage surpasses the limit that you agreed to, then you’ll have to pay a specified amount for each mile that is over the limit.
- Customizing vehicles in any way will mean you have to pay an additional fee for making modifications at the end of the lease.
- You’ll want to read your lease contract thoroughly to avoid any surprises later.
Be prepared and research what kind of car you want and how much your budget allows you to spend in order to feel more confident during the sales negotiation. As you're shopping for a car, you can shop around to find the right dealership or online car sales service. All dealerships pay the car manufacturers the same price for the cars they sell, but dealerships with a better customer satisfaction rating often receive bonuses that allow them to offer customers a better price.
Here are some tips for conducting a successful negotiation:
- Be prepared to negotiate. The salesperson may tell you that he or she wants to sell the car for your asking price, but has to ask the manager first. This is a common sales tactic, and if the initial price is not acceptable to you, don't feel pressured to accept the price on the spot.
- Shop for a car later in the month. There are a lot of bonus and rebate programs that are based on monthly sales quotas. If a salesperson or dealership is short of meeting goals at the end of the month, there may be more willingness to lower a car's price in order to make a sale.
- Disregard the manufacturer's suggested retail price. Also called the "sticker price," this is the number on the car window. It's just a starting point for negotiations.
- Find out about dealer incentives. Manufacturers sometimes give dealers extra money, bonuses and rebates for selling overstocked and undersold cars. Find out if the car you're interested in buying has any dealer incentives attached to it.
Add-Ons
The dealer may offer all kinds of add-ons after you've negotiated the price. The dealer makes extra money on almost every single one of them. You may find add-ons are included as if you have no other choice. Feel free to refuse them if the add-ons are of no personal benefit to you.
Here are some of the potential add-ons:
- Destination charges – Some manufacturers charge separately for shipping the vehicle to the dealer. You can't get around this, but check the sticker to make sure it wasn't already included in the price.
- Licensing and registration fees – These are necessary, but call your state's Department of Motor Vehicles to make sure the dealer hasn't charged extra.
- Extended warranties – These are also called service contracts. If you purchase a car with a good service history or track record, an extended warranty may not be necessary — take some time to consider what's best for you.
- Dealer prep – Part of a dealer's job is to get the car ready for you and it's one of the things the dealer gets paid for. Don't pay for this service twice.