March 05, 2021, 3:15 PM
Besides a house, a new car is usually the biggest purchase we make in our lives. When you’re planning to shell out tens of thousands of dollars for a vehicle, you want to make sure you pick one that fits your need and your bank account. And, most importantly, there are a few other steps you can take to limit how much you pay over that purchase price.
Step 1: Are you ready for a new car?
This is the step most people miss, because it seems intuitive, right? If your current car is failing you and is no longer reliable, then yes, you’re probably ready for a new car.
If you’re tired of your current vehicle, but it’s still working fine, you might not be ready. Here’s the question to ask: Are you still paying for it?
If you are, you might not want to buy a new car yet, and here’s why. Many dealers will offer to pay off your current loan, but really the balance on that loan could actually be added into the financing of your new car. In essence, you’re paying for two cars – one of which you don’t even own anymore.
So, if you’re still paying on your car, the better plan might be to wait until that loan is paid off and you’ve saved enough money for a down payment on your next vehicle.
Step 2: Get prequalified for a loan before you look at vehicles.
This is a good idea for multiple reasons.
For one, how much can you afford to pay? You should spend no more than 20%-25% of your monthly household income on all the cars in your household, including loan payments, gas and insurance. For the monthly payment on your new vehicle, shoot for 15% of your monthly income.
Getting prequalified can also help reveal any issues with your credit that might affect the terms of your loan. Dealerships are allowed to offer you a much higher interest rate than you qualify for, so understanding all your options can help you avoid paying more in interest.
Once you have your preapproval in hand, you can use it as a bargaining chip at the dealership.
Step 3. Do your homework.
This is the time to think not just about your new car, but also your life and driving style.
Do you want new or new to you? A new car is in perfect condition, but it’s also much more expensive. A used car can be substantially cheaper, but you also have to consider the condition it’s in – and how long it will last. A certified pre-owned vehicle offers a good balance of price and condition: it’s still under warranty from the manufacturer and has to meet approval that it’s still in like-new condition, but it can be thousands of dollars less expensive than a new model.
Once you’ve considered these questions, think about what you need your vehicle to do. Is it for in-town or highway driving? Do you need to haul equipment? Does it need to carry multiple children with bulky car seats? Thinking about your needs can help you decide whether a sedan, truck or SUV is a better fit, but remember to consider both your situation now and what you expect it to be within the next few years.
After narrowing down to what you need, think about what you want. Online research can help you find models you like and how much you should expect to pay for them. Are you planning to trade in your current vehicle? A little extra research will tell you approximately what your trade-in should be worth.
Armed with all this information, it’s time to go look at your choice vehicles in person. Visit multiple dealerships. If you find one you prefer but its price isn’t the lowest, see if it can match another dealership’s quoted price.
Step 4. Drive a hard bargain.
After you’ve picked the car you want, it’s time to buy it – that means negotiating a price. Keep in mind how much you want to pay, and how much your research says you should pay.
Once you’ve agreed on a purchase price, you’ll find yourself in the finance office, where the dealership will offer you lots of added-on products and services, like extended warranties. They’ll be putting the pressure on, because that’s one of the ways they make money, but just say no. You don’t know what those “extras” are really worth, and if you want the extended factory warranty, you can always buy it later.
Understand there are some things you can negotiate and some you can’t. The car’s registration and taxes, for instance, are set by the government, and there’s no wiggle room on them. It is possible to negotiate some of the dealer fees or unwanted extras, however. Use that to your advantage, and if you make any concessions in price, make sure you get something you want out of the deal – like upgraded floor mats or lifetime oil changes.
Using your loan preapproval for comparison, consider the loan the dealership is offering you. Look at the both the interest rate and the length of the loan. A six- or seven-year loan may have enticingly lower monthly payments – but you’ll pay much more in the long run. That’s because longer loan periods have higher interest rates, and the interest is front-loaded, meaning you pay more interest than principal in the first four years.
Most importantly, don’t be afraid to walk away at any point in the process if you’re not getting the deal you want. Spending thousands of dollars on a bad deal just to avoid walking away is a bad choice. Remember, you have plenty of options out there, and if something just doesn’t feel right, it’s probably not.
Step 5. Signing isn’t the last step.
By the end of a long day of car shopping, you may want to just be done and go home. That’s fine – go home and consider it, and then buy the car tomorrow. When it’s time to sign the paperwork, you want to take your time to read and understand what you’re signing. Make sure it says what you agreed to because, after you sign, there’s probably no going back.
Once you’ve signed the paperwork and driven away in your new car, you could be done with the process. But here’s an expert tip: to make sure you have the absolute best deal on your loan, check out the loan market a few months later. It’s possible that interest rates have dropped, and you could get a cheaper loan by refinancing.
If you have any questions about auto loans, give us a call at (800) 687-2265. One of our auto loan lenders would be happy to guide you through the process.
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