Your Financial Future:
Getting A Car: What You Need To Know
For a PDF version of this Fact Sheet, click here.
Buying a New Car:
- If you are going to take out a loan to get a car, do your research first. It is usually hard to find a lender who will refinance your car loan at a lower rate once you have it.
- Before you set foot in a dealership, do your own research by contacting your local newspaper to look for the best deals in your area. There are many places to get car loans: banks, dealerships, credit unions, and even online. Credit unions tend to charge lower auto loan rates, but negotiating can help you lofwer a bank’s rate as well. Usually you can do this if you are willing to have your payments deducted directly from your bank account.
- Ask a lender with a good rate if they will pre-approve you for a loan. This will let you know how much you qualify for and you will have a better idea of what you can afford when you walk into a dealership.
- Do not tell the dealer how much you can afford on your monthly payments. If you do, he has the opportunity to keep the cost within your current price range, not allowing you to negotiate for a lower cost. Instead, barter and settle on a price for the car before you discuss your financing.
- Steer clear of low down payment loans. The lower the down payment, the more you will pay over the life of the loan. A low down payment increases the size of the loan you need. Try to put down at least 20% up front of the price of the car. If you can’t do this, your smartest move is to look at a less expensive new car or a used car that better fits your budget.
- Go with the shortest term loan you can afford because the longer it takes you to repay your loan, the more interest you will accumulate. A loan with a term of four years or less is ideal. It is even better if you can pay the whole cost of your car up front.
Buying a Used Car:
- No matter the make or model, a car starts depreciating in value the second you drive it off the lot so new cars are not necessarily a good investment.
- A used car in good running condition can cost about half as much as a new car on average, meaning that you can downsize your loan by half. If you look for a make with a great reputation, you have a much higher likelihood of minimizing the risks involved in buying a used car.
- To make sure you are buying a car of good quality, buy from a dealer, ask for the car’s inspection history, pay an independent mechanic to inspect it for you, and consult your state auto association.
- If you buy from a private owner, run the car’s vehicle identification number (VIN) at http://www.carfax.com/ to do a more thorough background check.
Leasing a Car:
- Leasing a car is similar to renting: it means that you are paying for the use of that car for a fixed number of years, usually three. You generally lease from a dealer who acts as a middleman on behalf of a leasing company.
- It is generally better to buy than lease a car, but if you do not have enough money for a down payment, leasing is an option. When you lease a car, you pay for the portion of the car’s value that is lost during the lease period, along with interest. The monthly payment on this amount is usually less than the monthly payment of a new-car loan, making leasing a cheaper option in the short-run.
- At the end of the lease period, you can either return the vehicle to the dealer or purchase it. Some people lease with the intention of eventually buying the car with a used-car loan. Although you would start out with lower payments while leasing the car, lease-to-buy plans are almost always more expensive than outright buying a car in the long-run.
- Before you lease, you should know:
- The “price” of the car (called its “capitalized cost”), which is the basis of your monthly payments
- The probable value of the car at the end of the lease (the “residual value”)
- Your monthly payment amount
- The lease term
- The total mileage you are allowed: If you exceed this total (typically 10,000 to 15,000 miles per year), you will have to pay a penalty on each excess mile, which can be as much as 25 cents a mile.
Kelley Blue Book, another consumer-oriented website with guides on car pricings: http://www.kbb.com/.
Kiplinger’s provides calculators to help you decide which option you should take if you have to choose between a low rate or a cash rebate, how to decide if it is more financially viable for you to buy or lease a car, and other important calculations: http://www.kiplinger.com/.
Consumer Reports offers independent reviews on a variety of consumer goods, including cars: http://www.consumerreports.org/.
Sources: Kobliner, Beth. “Get a Financial Life: Personal Finance in your Twenties and Thirties,” New York: Simon & Schuster, Inc., 2009.