Six Things You Must Know to Make a Smart Car-Buying Decision
If you just walk into the dealership, pick out a car, and do the financing, you could be walking away having paid hundreds, even thousands, of dollars more, directly or indirectly, than you should have.
Here are the top six things you should know to be ready to buy a car at the best total price (short- and long-term). You'll also find links to excellent Web sites for fascinating additional information.
Are You Upside Down On Your Current Car Loan?
You may know people who decided to buy a car, only to find that they couldn't afford to because they were "upside down" on their current loan. Welcome to the 60-month (or longer) car loan.
There was a time when car loans were a standard 36 months. Gradually the term became longer to enable more people to qualify for loans they couldn't really afford, by lowering the monthly payment. The longer the term, the more you'll pay in interest, so a lower payment is really not your friend. If you try to sell your car before the loan term is over, you may find that the car is worth less than you owe on it. To buy a new car, you'd have to pay off the balance on the original loan or roll it into the new loan, which creates a very expensive car. Buying a car that depreciates quickly is another thing that can cause you to be "upside down" on your loan. Research this at Edmunds.com.
Have You Researched the Trade-In Value of Your Current Car?
Keep the trade-in of your old car and the purchase of your new car as separate transactions. Get the trade-in offer before discussing the price of the new car. Some dealerships will offer you a good trade-in but will raise the price of the car you're buying. You need to know the trade-in value of your current car, and decide whether you'd rather sell it yourself than trade it in.
Have You Researched Interest Rates on Car Loans?Don't evaluate the deal based on the monthly payment. The interest rate is where most of the cost is. Know how much you'll pay over the life of the loan. If the dealer offers a good interest rate, find out what credit score you need to qualify for that rate. It's not uncommon for new car buyers to be quoted a rate, complete the paperwork, and drive away in their new car only to get a call a few days later saying they didn't qualify for the rate quoted and their payment will now be so much more per month. Know ahead of time what rate your own bank (or any bank you choose) would give you on a new car loan before you decide between a bank and the dealer. Hint: a bank will usually end up cheaper).
Have You Considered the Benefits of Buying a Used Car?
There's nothing like the feeling of buying a new car, but consider the cost. Cars depreciate sharply in the first two years - as much as 30 to 40 percent. The car you paid $25,000 just two short years ago may be worth only $15,000 now. As long as you keep it for eight years or more, it's a moot point, but if you trade it in before then, you'll end up having paid a lot more money for the car.
Do You Know the True Cost of Ownership of the Car?
Don't find out too late that you can afford to buy the car, but you can't afford to own it, due to operating expenses, insurance, gas mileage, annual excise taxes, and other costs of ownership. You're not ready to buy a new car until you've researched and considered this information.
New car buyers often don't consider the higher costs of repairs and maintenance for certain models, tires that cost twice as much as those on other cars, higher gas costs, and higher insurance (depending on make, model, and even color).
One of the most important considerations is the repair record of the make and model. Does it have a history of problems with the transmissions? Brakes? Electrical systems? What does it cost for routine repairs and maintenance? You can find all this information at Edmunds.com . This is a great site that can really help you save money and avoid being taken advantage of.
Have You Evaluated Any Dealer or Manufacturer Offers Like Rebates or Low Interest Rates?
A $2,000 rebate on your new car may sound good, but are you sure it beats the low-interest-rate deal the dealer may offer as an alternative? Don't be fooled by the lure of cash upfront. It's not always the best choice. At Edmunds.com you can find out how to evaluate these offers so you come out ahead. You can also find out about rebates and deals that manufacturers offer but the dealer doesn't tell you about (instead they pocket the savings meant to be passed on to you, the buyer).
The Bottom Line
Do your homework. Don't roll the balance of an upside down loan into a new loan just because you're tired of your old car. Get the trade-in offer before discussing the price of the new car. Then use all the information and knowledge you've collected to negotiate a good deal.