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You need the car to get to work, so how do you pay for the car?


Before You Start

Do you remember when you turned 16 and the freedom that came with getting your driver’s license? Even now, the feelings of excitement and adventure still rush back when buying a new car. But there is a lot to navigate in the car buying and auto financing process, and many car shoppers dread the pressures of negotiating and feeling “sold to.”Here is our advice for buying a new car that can make it enjoyable again.

Decide on a New or Used Car

When it comes to making the decision between a new or used car, it all comes down to depreciation. You may have heard that a new car loses value the minute you drive it off the dealership lot. It’s not a myth. Your car – whether new or used – loses value with every mile you drive, but the biggest depreciation hit comes with a brand new car.

Consider this example from NerdWallet:

New car depreciation: You buy a car for $30,000 and sell it three years later for $15,000. The car has cost you $15,000 in depreciation.

Used car depreciation: Now let’s say you buy the same car, but it’s three-years-old when you buy it. You could buy the car for $15,000. Three years later you could sell it for $10,000. So the used car depreciation cost you only $5,000.

According to Consumer Reports, most new cars lose about 47% of their value in the first three years you own them. However, if you buy a used car that’s three-years-old already, the biggest depreciation hit has already happened, and your car will only use about 18% of its value in the next three years (years three through six).

Thinking beyond depreciation, there are other pros of buying a new car or used car:

Pros of Buying of a New Car

Choice: Buying a new car affords you the luxury of choosing the exact model, color, interior, and “extras” you want.

Financing: Car manufacturers are always offering special promotions to entice shoppers to buy their cars such as cash rebates, percentage savings, or interest-free lending. New car loans also offer better interest rates which can save you thousands of dollars in interest over the life of your auto loan.

Advanced Technology: With a new car you’re getting all the latest bells and whistles – safety features, navigation systems, streaming radio, and in-car WiFi, just to name a few. Additionally, new cars offer the best fuel efficiency.

Reliability: While new cars are generally more reliable than used cars, if you do have a breakdown, a typical factory warranty will have you covered for the first 36,000 miles or three years.

Pros of Buying a Used Car

Price: The biggest advantage of buying a used car is that you’ll be spending less money on your purchase.

Lower Insurance & Registry Rates: A car that costs less to buy, also costs less to insure for collision and comprehensive coverage. The cost of registering a used car also goes down every year.

Reliability: Used cars are not junkers. In fact, they are more dependable than ever, often undergoing comprehensive inspections and maintenance prior to resale. Today’s used cars can go more than 100,000 miles before needing major repairs.

Know What You Can Afford

Once you’ve made the decision about a new car or used car, it’s time to start thinking about how much you can afford to pay for a car. If you don’t know where to start, you can follow this a rule of thumb: your monthly budget for auto expenses should not be more than 15-20% of your take-home pay. (This is the number on your paycheck, not your yearly salary.) Be sure to factor in all the costs of car ownership including registration, taxes, gas, maintenance, and insurance for all the cars in your household, not just the car you are looking to purchase!

Another popular guideline for understanding how much you can afford to pay for a car is the 20/4/10 rule. It breaks down like this:

  • Put down a 20% down payment. The higher your down payment, the less money you’ll need to borrow and the less interest you’ll have to pay.
  • Choose a loan term of 4 years. While your monthly payment may be less with a five- or six-year loan, you will pay more in interest charges over the life of the loan when your loan is drawn out
  • Allocate 10% of your gross income to your monthly car payment (principal, interest, and insurance).

Finally, utilize an online calculator to determine what you can realistically afford when buying a new car. Answer a few simple questions on financing rates, down payments, and trade-in value and you can calculate the monthly payments that will work for you.

Don’t Forget Insurance

If you’ve driven an older car up until now and are ready to invest in a brand new car, you might see a pretty big jump in your premiums. That’s something you’ll need to budget for. Reach out to your insurance agent with the specifics of the new car you’re looking at and he or she will provide a quote.

The Financing Process

Check Your Credit Score

Lenders will use your credit score as an indicator of your likelihood to repay an auto loan. Credit scores range from 300 to 850. A prime score is 700 to 850, near-prime is 620 to 700, and subprime is less than 620.

Your credit score additionally plays a key role in financing a car because it affects the interest rate that lenders will offer. Even the difference of few percentage points can result in thousands of extra dollars over the length of your auto loan.

Get Pre-Approved

A pre-approval can make car shopping much easier. Much like getting pre-approved for a mortgage, when you’re pre-approved for a car loan, you have an idea of how much money a lender is willing to lend you, the interest rate you’ll be charged, and other loan terms. This will give you a better feeling for how much you can afford to spend on a new car.

To get pre-approved, a lender will review your proof of income and your credit history. It’s a simple process that can often be initiated online or over the phone. You can get pre-approval from several lenders as a way to compare the interest rates and loan terms available to you.

Once you’ve found the car of your dreams and worked out a final purchase price, the dealership’s finance department will contact your chosen lender to work out the final payment.

Financing Through Your Credit Union or Dealership?

This is a question that many car shoppers struggle with. If you’ve been pre-approved, you’ll know the interest rates that your credit union or another lender will offer you. But the dealership may encourage you to use manufacturer financing.

There is often a chance to take advantage of special financing dealers offered directly from the carmaker, whether it’s 0% financing on new models, cash back on a new car purchase, or technology upgrades. These offers are typically only available if you finance through the manufacturer and may include some limitations on your financing.

Compare all the financing options available to determine which is truly the best deal.

Purchasing Your Car

Know the Value of Your Trade-in

Trading-in your current car to the dealership can significantly lower the cost of your new car and the amount you’ll need to finance. The trade-in value represents the price that a dealership offers you for your current car and is determined by the market value of your car’s make/model, mileage, and condition.

Do a little research into your car’s value so you know what to expect when you begin negotiations with the dealership. Kelly’s Blue Book has long been a trusted source for evaluating auto trade-in values. Even cars in near-perfect condition are unlikely to receive the full Blue Book trade-in value because dealerships need to factor in some wiggle-room for resale. But, there are small things you can do to increase the value of your car:

  • Wash and detail your car
  • Make minor repairs (dings in your windshield, burned out interior lights)
  • Get current with maintenance (oil change, tire rotation)

Tips for Negotiating the Price

Negotiating with a salesperson is probably the most undesirable part of the car buying process. It may feel like the dealership has the upper hand because they have all the information and have the final approval, but this doesn’t have to be the case. Here is our advice to help you feel more confident.

  • Car shop at the end of the month or end of the year. Sales teams are eager to meet their sales quotas and may be more willing to make a desirable deal at the end of a selling period.
  • Know what your ideal car typically sells for. Searching websites like TrueCar you can find out what cars of the same make and model and with similar features have sold for across the country.
  • Visit more than one dealership. The goal here isn’t to take up your entire day. Instead, it’s to obtain more than one offer, which allows you to make comparisons. You can often use a lower offer from dealership you don’t really love to negotiate with a dealership you prefer more.
  • Negotiate the price of the car, not your monthly payment. Once a salesperson knows the monthly payment you want to pay, they can boost the total cost of the car, as long as it fits into your desired monthly payment.

Consumer Reports walks you step-by-step through the process of negotiating the price of a new or used car.

Unexpected Places to Buy a Car

The car buying process has shifted quite a bit in the last few years. You no longer have to spend hours at a dealership browsing the inventory, negotiating the purchase price, excess fees, trade-in value, and financing. Now car buyers can avoid the dealership experience altogether and look into these surprising and less common places to buy a car.

Online Car Buying – As with everything else, car buying is becoming more and more popular online. Not only are there sites like CarMax, TrueCar, or AutoTrader, but now individual dealerships are creating specialized “internet sales” departments. Online car buying allows you to skip the hours spent at the dealership. You’ll only need to stop by for an initial test drive and to finalize the bill of sale, financing paperwork, and pick up your keys!

Rental Car Fleets – When thinking of places to buy a car, have you considered a rental car agency? Rental agencies are always adding new makes and models to their rental fleet. To make room, they take chosen cars from their inventory and sell them to used car shoppers. Because car rental agencies take great pride in the maintenance of their fleet, you can ensure that the car you’re purchasing is inspected and certified to be in top-notch condition.

Buy Your Leased Car – So you’ve been driving your leased car for two to four years and you’re happy with it. It drives great and has given you no problems over the length of the lease. Instead of working with your leasing company to move on to a new model, you may want to work with them on purchasing your leased car instead.


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