There are few rites of passage that are as exciting as buying your first new car. I remember it vividly. Unfortunately, that’s mostly because of all mistakes I made in the process and how those decisions would affect my finances for the next several years.
No matter how many vehicles you’ve purchased in your lifetime and how much you’ve learned over the course of those transactions, buying a car is still major financial decision that shouldn’t be taken lightly. In fact, from financing options to registration fees, there’s plenty to consider at every step of the process. To help steer you in the right direction, here are just some of the things you should be thinking about when deciding to buy a car:
Financing a Car
One of the first things to concern yourself with before going car shopping is what shape your credit is in. Furthermore, if it’s not looking so hot, you’ll want to ask yourself if you could realistically raise your score before pursing financing. That’s because the amount of interest you end up paying on your car can rise dramatically if your creditworthiness isn’t up to par.
If you’ve never checked your credit scores or reports before, the first place you should start is AnnualCreditReport.com — an official site that will allow you to download your credit reports from all three major bureaus for free on a yearly basis. You’ll want to review each report carefully to ensure all of the data is correct as some errors may be affecting your credit scores. Luckily, such errors can be disputed and hopefully be fixed.
Once you have an idea of what your credit report looks like, you may be wondering how that translates to a score. While you can purchase a report with your FICO score from the various bureaus, one free option is CreditKarma.com (which you can read my full review of). Now, I do have to mention that Credit Karma and similar sites actually use a different model to tabulate your scores than your car financier might, but it should still give a pretty good idea of where you stand. Additionally, it will offer a few tips for how you can raise your scores overall. Depending on your situation, it may be worth holding off on seeking financing until you can get your credit to a better place and secure a better rate.
Down payments and term lengths
After you get your credit to peak form, it’s time to consider how much you can afford to pay for your car. This includes both a down payment and your monthly payments. As you’d expect, making a larger payment upfront will lower your monthly payments and may also serve to secure you a better interest rate. However, as you look for financing, you may find some tempting options that may not be best for you in the long run.
These days, there are many options for buyers with good credit to purchase vehicles for $0. This may be a plus for those who need to replace a vehicle and don’t have much saved, but will lead to higher payments over the lifetime of your loan. On the other hand, some buyers may wish keep their payments down by taking out a loan with 72-month terms as opposed to the standard 60. In both of these cases, it’s important that you do the math and know how much you’ll end up paying in interest under each scenario. Instead of choosing longer loan terms in order to fit a car payment into your budget, you may want to pick a less expensive car (e.g. an older, used model) that you can afford. Alternatively, you can hold off on finding financing until you save up a larger down payment, which will also help lower your monthlies.
Lease or own?
Another potentially tempting option you’re likely to come across in your car research is leasing. This arrangement can mostly be compared to renting an apartment as opposed to buying a home. Under most leasing agreements, you’ll take “ownership” of a vehicle for an agreed upon length of time before returning it to the dealership. There are many aspects of leasing that drivers enjoy, but there are also several financial downsides to assess as well.
Perhaps the biggest benefit of leasing in eyes of many car shoppers is that your monthly payments will be lower than if you were to purchase the vehicle. This could allow you to drive a nicer, newer car and still have it fit into your basic budget. Moreover, after your lease is up, your free to lease another vehicle and always be driving a relatively new car… of course, you’ll also always be making a car payment.
This brings us to the downsides of leasing. First, when you buy a car, there will hopefully be a number of years when you are able to drive your paid-off vehicle before eventually selling it or trading it in. With leasing, that day never comes, as you’ll consistently be paying to rent the latest and greatest. Another drawback to mention is that leases often have mileage caps along with overage penalties. Similarly, you may be held responsible for damage done to the car beyond some reasonable wear and tear. For these reasons and more, you will definitely want to weigh the pros and cons before being wooed by the leasing concept.
Lest we forget, unless you’re buying a Tesla, getting a good deal on a car will likely take some negotiating. For example, you might try to get certain fees waived, attempt to get your car at “invoice” price, or score a higher value for your trade in. All of these are possible, but it always helps to have leverage.
One potential way to help turn things in your favor is to already have financing before walking into the dealership. If possible, paying all-cash will certainly help you gain that leverage, but even having third party financing in place can have a similar effect. There’s also the chance that the dealer will also try to offer you a better deal on financing than your third party, which too can work to your advantage.
While you’re negotiating, it’s always important to have a final number in mind. This figure should be reasonable but you should be serious about it and be ready to walk away if your demands aren’t met. (incidentally, this is one area where I actually did fairly well when buying my first car, getting the salesman to come down just below my $17,000 limit). Also remember that, even if you and the dealership are only a few hundred dollars apart, that’s a big difference! After all, you wouldn’t spend an extra $500 on anything else, would you? I didn’t think so.
Your current vehicle
Do you want a new car or do you need one? This is an important question to ask yourself before getting too excited about buying. In some cases, it may actually be better to simply repair and maintain the vehicle you have rather than trying to fix your automotive woes with a shiny new model.
Look, it sucks to pay for car repairs, especially when you don’t see them coming. In fact, part of the reason I ended up selling my last car was because I knew it was due for some new tires, a battery, and an oil change. Still, I’ve also learned the hard way that adding a car payment to your budget doesn’t do you any favors financially. For that reason, you should really think hard about the condition of your current vehicle, how much you could get from selling or trading it in, and whether the necessary repairs may be a better deal than investing in a new car. As much as surprise repair expenses suck, taking on another 5+ years of car payments can be even worse.
When I bought my first-ever new car, one of the many mistakes I made was not preparing myself for the jump my insurance premium would take. There are several reasons for this, starting with the value of the vehicle; the more a car is worth, the more it costs to insure. In that same vein, if you’re financing a car, your lienholder may require you to add certain types of coverage you may have waived otherwise. So, as your calculating whether or not you can afford a new vehicle, it can’t hurt to get a couple of insurance quotes so you’ll know what you’re in for.
Registration and taxes
Similar to the insurance situation, you may end up paying more to register your new car in your current state. Each state does things a bit different, but several of them base your vehicle registration fee on the car’s value. This is not only something to be aware of when you get to the dealership (where you may pay your first year’s registration at the time you buy the car) but also an expense to consider in subsequent years.
Even if your state/county/city doesn’t factor your vehicles value into your registration, they may instead have personal property tax. This too can vary, but could be yet another increased expense you’ll encounter by upgrading your ride.
Finally, there are many reasons why drivers may be concerned about how many miles their vehicles can drive on a gallon of gasoline. These range from concerns about the environment to the amount they’ll be spending on fuel given their commute. Although gas prices are relatively low at the moment, if you drive long distances to work or are a road trip regular, it may be worth investing in a car that will merely sip gasoline. Meanwhile, the premium that comes with Prisuses (or Prii, officially) and other hybrid vehicles may not be worth it if you don’t do a ton of driving. This isn’t to say you should buy a gas-guzzler for the heck of it, but MPG and your driving habits are just two more things to think about when weighing your vehicle options.
Regardless of how old you are, buying a car is a big deal. Because of this, it’s important to think through every aspect of the process in order to make the best decision possible. Whether you end up running the numbers and getting a great deal or end up determining that now might not be the best time for you to buy, this thoughtful approach to car buying can go a long way.
Also published on Medium.