4 Finance Tips for First-Time Car Buyers

4 Finance Tips for First-Time Car Buyers

  • Before you buy a car, decide first if you can buy it in cash or if you apply for a loan.
  • If you decide to apply for a loan, then you should study all the options available to you.
  • You can avail of dealership financing, but this may not be the best deal out there.
  • Bank financing, personal loan, and credit unions are some of the other options that you can consider when buying a car.
  • There are car loan websites that can forward your application to lending companies.
  • Instead of buying a car, you can also consider leasing one.
  • Before applying for a loan, check your credit score and correct any mistake.
  • Make sure to do your research before deciding on what car and what type of loan you will get.
  • Take your time so you can find the best deal.
  • Refinancing a car loan is good only for some situations but not all.

The first time you buy a car will definitely be riddled with excitement and anxiety, which you will probably not feel the second or third time you make a purchase. Either way, the process would still be the same – you have to decide which model to buy, scout a dealership, look for the best deal, and decide how you will pay for it, either in cash or installment.

If you opt for the latter, then you should consider all the options available to you. Remember, before you walk through the car dealers’ door and sign up those forms, you need to make sure that you have covered all your bases in terms of payment. There might be another option that you have not looked into or possibly another way to get the model that you really like.

1. Decide Between Cash or Loan

Purchasing a car with cash or getting it through financing is a common question. There are pros and cons for each, and the decision would depend on your situation and preference.

  • Cash

Buying in cash means that you pay the sticker price of your desired make and model. It might even be lower, depending on the offer or if you can negotiate it, and you do not have to pay extra fees and interests. A few dollars off the selling price is still considered saving, after all.

After paying in full, you do not have to worry about the monthly payments anymore, just its maintenance and upkeep. Because you do not incur any debt, you will feel even prouder driving your new car. It is as simple as that, like buying a book and handing the cashier your $20 bill.

In the future, if you decide that you want to sell your car, you would have an easier time since you have the title, another advantage of paying in full.

On the downside, you have to dish out a lot of money. For example, if the car is worth $30,000, then you have to pay that amount plus any other outright expense.

Remember, even if you have saved enough to buy in cash, you should make sure that you still have funds for daily use and for emergencies – do not let all your money go into buying your vehicle.

  • Loan

Opting for a loan will make the payment lighter since the price will be spread out into several months to a few years, depending on the duration you choose. However, you will have to go through the process of applying for a car loan or car financing and your application is subject to approval by the bank or the lending institution.

Moreover, you still have to have some cash for the down payment. The amount would vary depending on your situation such as your credit score, if the car you are buying is a new car or a used one, and so on. And since it’s on installment, the total price you will pay will be higher than the sticker price of the car.

For example, if the car is $30,000 and the down payment is 20 percent, then you have to prepare at least $6,000. If the term is 48 months with no sales tax and the interest rate is at 3.21 percent, then you would be paying $533 per month or a total of $31,584 [$6,000 down payment + ($533/month x 48 months)].

Also, having a car loan means that the bank or lender holds the car’s title, which will not be released until the loan is paid in full. This means that if you decide to sell your car before the end of the term, then there will be a lot of paperwork involved.

A loan or financing is appropriate for people with a high credit score and a favorable credit report. Banks and lenders can offer them a lower interest rate against the car loan.

If you are not in a hurry to buy a vehicle, then it would be to your advantage to save a portion of your income each month toward your car purchase. In other words, instead of paying the monthly installment for the next several years, you can instead save the same amount each month (or a bit more) and wait a few years, until you have enough funds, before buying a car.

2. Consider Your Financing Options

If you do decide to pay on installment, then you should consider all options available to you. There are many ways to get financing for your car, and you need to check them all so you can get the best deal.

  • Dealership Financing

One of the common misconceptions, especially for first-time car buyers, is that car dealers offer the best financing deals for vehicles. It ought to be since it is their specialty product, but it is usually not the case.

Walking straight into a new or used car dealership without a well-thought plan is not a wise move. The truth is, it is not the dealer that will lend you the money; a lender will still be in the middle. The car dealer simply offers you the convenience of not going around your community and applying for a loan yourself. The car dealer uses a lending company it already has a relationship with, a setup that many financial experts simply do not agree with.

Often times, this so called “relationship” will cost you money. Apart from the principal, interest and fees, many car dealers also tend to put their own additional percentage on your loan. In other words, they earn when you purchase your car, which the lender pays in full on your behalf, and they also earn from your loan.

To cite an example, a first time car buyer recently shared their experience on Reddit. Initially, they signed up a buyer’s order for a $10,000 used vehicle with a 6 percent interest rate. This was acceptable to them so they deposited $2,000 down payment. They also said that their credit score is good.

The following day, the dealer called them up and said that that the initial interest rate was not approved and needs to be adjusted to 12 percent, reasoning that they are first time buyers. Eventually, they decided to back out from the deal, pulled their deposit out and went to a credit union. There, they were initially assessed for a 2.5 percent interest, pending approval. Yet another lender pre-approved them with a 3 percent interest rate.

Many of the comments also agreed not to go for dealer’s financing arrangements.

  • Bank Financing

If you have a checking or savings account, you can also see if your bank offers an auto loan. Most of the time, bank financing offers more flexibility, especially for those customers who happen to have a good standing with them.

Additionally, after you thoroughly discuss your auto loan with your bank, you can walk out the door armed with all the information that you need. This includes your pre-approved amount, your interest rate, your monthly amortization, and other related terms and conditions connected with the auto loan. There are also no hidden charges in a bank auto loan.

Banking institutions look first into your credit history before offering you a loan; on the other hand, auto dealers try to sell you a car first before they check your history.

However, if you opt for bank loan, you will not be able to take advantage of certain dealership options like interest rate packages and special rebates. These are exclusive to the dealer’s in-house financing.

  • Credit Union

If you are a member of a financial cooperative or you have access to a credit union, then you should also walk in and talk about your plans of purchasing a car. Who knows, they might even offer you a lower interest rate than what you have on hand.

Credit unions are considered by experts as established lenders, just like banks. Their main difference is that they cater specifically and only to the members of their institution. Nonetheless, they offer services similar to commercial banks. They also offer very competitive rates to entice their client-members to keep coming back for more.

Again, just like with banks, special rebates from the dealership will not be applicable to you, unless the credit union has a direct participation with the auto dealer.

  • Online Auto Loan

Nowadays, you can also apply for an auto loan online. It is basically the same as filling out the form with pen and paper, but with this option, you fill out the form on your computer or smart phone. However, these are not the actual finance companies or lenders; rather, they will connect you with several within your area. This option will give you the freedom to shop around and decide which lender will offer a lower interest rate.

One of the well-known portals available is CarsDirect, which was originally known as a car-buying service. Now, a section of their website is dedicated to auto financing that specializes in second hand cars.

Another website with the same capacity is MyAutoLoan. Aside from hooking you up with lenders, they offer application for lease buyouts. Additionally, the website only caters to those who are interested in taking a minimum loan of $8,000, and requires a minimum monthly income of $1,800 for its possible loan applicants.

Again, the two websites will give your information to several lenders so you should expect calls and emails selling you their loan services.

  • Personal Loan

You could also take a personal loan in order to fulfill the whole purchase amount of the vehicle or part of it. It really depends on how you will use the money that you borrow. The concept is similar to paying in cash, so you have the car’s title immediately.

Additionally, personal loans offer a good fixed interest rate if your credit rating is at its peak. Just make sure that you shop around and not rely on just a single financial institution.

You also get to choose the loan period, which normally goes for 12, 24 and 36 months and could be longer for some. Just remember that the longer the term of payment, the more interest you pay. In comparison, most car loans range from 36, 48 and even up to 60 months.

Some lenders of personal loans may be able to release the money immediately, but usually, you have to wait for it to come through. Also, personal loans may not be the most economical way of borrowing money. There are instances wherein car loans or even car dealers may offer a lower interest rate.

  • Car Leasing

Vehicles are opposite to a property or a house in terms of value: the former depreciates while the latter appreciates. As oil baron J. Paul Getty once said, “If it appreciates, buy it. If it depreciates, lease it.”

Personal car lease has gained popularity in the last few years for those wanting to have a new car to drive around. However, as the name suggests, you will not own the car.

If in case you decide to go for a car lease, it usually requires a small amount as down payment, which is usually around three months worth of the monthly lease. After filling up the form and giving the payment, you can drive around town in a car that is way above your price range.

Maintenance is also covered by your monthly payment, but there is a predefined mileage. Additional charges will apply if you go overboard. You also do not need to avail of a car loan with this option.

Another interesting aspect of this option is, you can drive a brand new car every two to four years, depending on the contract you sign. At the same time, you will benefit from the latest technology that is available for newer car models.

3. Check Your Credit Report, Score, and History

Loan institutions will definitely check your credit report and score just to make sure that you are worthy of a loan. The numbers that will be shown by these documents will determine the loanable amount and the interest rate that you are entitled to, if you qualify for a loan. Therefore, it is important that you try to get these documents first before walking into the dealership.

Experian, Equifax and TransUnion are the three of the private credit reporting systems often used by banks and lenders. Additionally, the federal government also set up the Annual Credit Report website that offers free credit reports and should be checked out as well.

For credit scores, Credit, CreditKarma and CreditSesame are the most commonly used.

Knowing beforehand your credit report and score will give you an idea of the kind of financing terms that you will get. Also, if there happens to be any mistake with some of the information, you will still have the time to fix it. These errors will cost you money in the long run.

It is worth mentioning here that you should do your best to keep your credit score high and your credit history clean. This way, you will have little or no trouble when applying for a car loan. Similarly, once you do get an auto loan, pay on time so your credit rating will not get tainted.

4. Do Your Research

For any purchase that involves a big amount of money and several years to pay, it is only appropriate to do your homework properly.

  • First and foremost, make sure that you can afford the car that you would like to purchase. It would not make any sense if it is way beyond your budget. This does not only mean the price of the car; it also includes the cost of using and maintaining it. There are taxes, insurance, fuel, parts replacement, parking, cleaning, and so on. If you buy a vehicle that you cannot afford, you will just end up with late payments or, in the worst case scenario, your car may even be repossessed.
  • Take your time. Since vehicles are costly, do not jump in at the first nice model you see. Study everything, from the cost of maintenance to the monthly installments you have to pay. Also, there are seasons and holidays when dealers offer plenty of promos, so you may want to make the most of those.
  • It is also advisable to get two to three different quotes from each available option that you have. For instance, visit three dealers, a couple of lenders, two banks, and so on. You will never know if the financial institution that you always see on your way to work has a much better offer than, let us say, your preferred bank. Do not let anyone pressure you when making a decision such as this one.
  • If you have an excellent credit score, you can take advantage of the low interest rates that car dealers are offering. If not, you have to stay away from them and simply put that option at the end of the list, CNBC
  • It is also worth noting that there are no right or wrong options. Not every car buyer has the same financial conditions, so everything is dependent on the situation you are in at the time of your vehicle purchase.
  • Lastly, if you can limit your car loan to the shortest possible time, so much the better. A long term loan does give you a lower rate for monthly payments but, in the long run, you will be paying more for your car. An ideal amount of time to pay for a brand new car is around 4 to 5 years.

Shopping around for the best rate available is never a bad idea. After all, it is your right and it will be you who will pay for it.

Refinancing Your Auto Loan

This is not for everybody, not unless you have purchased a car with a loan before. Still worthwhile to mention here that auto loan refinancing will rely heavily on age, mileage and current value of the vehicle.

There are instances wherein it would be wise to refinance your auto loan, which is to replace your current car loan from another lender or simply move to a lower interest bracket.

There are also different reasons behind every refinance – to lower the monthly amortization, to reduce interest rates, or to adjust the loan’s length. There are also instances when refinancing might be able to save you hundreds or even thousands of dollars during the life of the loan, depending on the market condition. If interest rates have changed dramatically for the better, meaning lower interest rates, and your current auto loan is above 6 percent, then you could benefit from refinancing.

This option is also advisable to those who had significant improvements with their credit reports and credit scores. If you previously had a low score but it has greatly improved during the past few months, or you have meticulously made several on-time payments, you might be able to convince your lender to have your loan refinanced.

 

Taking everything into account, car buying is not an easy thing to do. It is not as simple as getting your groceries, unless you are paying the full amount. But if you are armed with all the information before waking into the car dealer’s doorstep, you will be enjoying your new vehicle in no time at all with a reasonable interest rate.

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Martin - Head of Real Estate and Finance at RateTake
Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.
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ratetake

Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.