The Ultimate Auto Loan & Purchase Guide
Although buying or leasing a car is very common, the experience is different for every person. Some people prefer to keep costs low and consider only older vehicles while others prefer to buy new vehicles for which a loan is usually needed.
Even though every experience is different, there are common guidelines that can be followed to ensure that you get the best deal and, more importantly, get the right car and agreement for your specific needs.
This guide will take you through the process of shopping, financing and buying a car, with a focus on making the best financial decisions along the way.
Before You Get Your Auto Loan And Buy Your Car
Before you start shopping, there are some things you need to consider. Remember, there is a lot more to buying a car than driving off the lot.
Address budget and credit issues
One of the more important issues you will need to address is what you can afford. First, look at your budget and decide what you have available monthly for a new car payment.
Keep in mind, there are other expenses like excise tax, fuel, insurance, and maintenance you should take into consideration. These expenses all add up to the amount of free cash you need to have available to support a new car.
Your credit score matters when you apply for a car loan. The better your credit score, the better the loan rate you qualify for. Your credit score can also have an impact on how much money you are eligible to borrow; the better your credit score, the more likely a lender is to look positively at your overall application. Credit scores also impact lease terms, a low credit score may mean a higher down payment, and higher interest rate.
Should you buy or lease?
Like every decision, you should carefully weigh the pros and cons of buying versus leasing a car. For some people, particularly those who need a high-end car for business purposes, leasing may be the best option.
Leasing a car means lower maintenance costs, lower sales taxes, and the ability to upgrade your car every few years as necessary without the typical hassles associated with trade-ins.
Buying a car offers you more flexibility; you are not constrained on mileage, you can modify the vehicle to suit your style, and you are free to sell the car whenever you elect to do so. For most consumers, lower payments are another good reason to buy rather than leasing.
Should you buy new or buy used?
We are often tempted by the accessibility of the latest technology, the new car smell, and the freedom of knowing nobody else has had the car when we consider buying a new car.
We tend to forget that most new cars lose 20% of their value the minute we drive it away from the dealer. Additionally, insurance costs are usually higher for new cars; and sales taxes are also more of a burden.
This is not to say that buying a used car is always the answer. First, without proper history, you have no idea if a vehicle has damage, has uncorrected recalls, or how the car has been cared for.
Challenges are even greater if the car is more than three years old; this is when a used car could be costlier in the long run than a new car.
There are upsides however; the prior owner will have taken the hit on the dropping value, you will pay a lower insurance rate, and sales tax will likely be lower.
Affordability and identifying the best car
Once you know what you can afford, you will have to determine what type of car will best meet your needs. Some of the issues you will have to factor into your decision include:
- How many people will you be transporting?
- What type and how much cargo will you need to transport?
- Is an automatic transmission a necessity or will a standard work?
- Does your vehicle need to be more practical than sporty?
- What matters more, fuel efficiency or power? Do you need both?
Getting The Right Car And The Right Deal
After determining what you can afford, making sure your credit will withstand a lender's scrutiny and have decided what type of care best meets your needs, it will be time to start shopping.
There are some steps you should take before making a final decision including:
- Do your homework before shopping — comparison shopping is your friend. Take advantage of newspaper advertisements, radio advertising and search the web. Make sure you have a firm idea of the car you want to purchase, or lease, and what you are willing to pay before you step foot on the lot.
- Common advertising lures — common advertising gimmicks include no money down, free financing for specified periods of time, and trade-in credit regardless of condition. These tricks might work to get you to look, but there are usually catches associated with them; there is usually some fine print involved in these too good to be true advertising gimmicks.
- Dealing with dealers — dealers will expect you to haggle somewhat on price; just because there is a sticker price does not mean this is the price you should pay for the car. One other thing to be careful of, a common trick, is handing your driver's license over for a test drive. Make a copy and bring it with you. Remember, you cannot leave the lot if you have no license; give the person driving with you a copy of your license if requested, but never your original.
If you should find a car that meets your needs, the pressure will not be off; the dealer will encourage you to add on unnecessary extras; remember, in many cases, these are simply going to drive up the base price of the vehicle.
Dealers may also try to sell you an extended warranty. The first thing you should know is there is no rush; you do not need to make this decision immediately. The basic things you should know is that first, if you are going to upgrade your car in four years or less, you may not need an extended warranty.
Additionally, if you do decide that an extended warranty is right for you, then you have time to shop around and get a better price than you may be offered at the time of the sale.
What You Need To Know About Leasing
If you have not decided whether you should buy or lease, then you may not want to consider shopping until you do; for some people, leasing may be the answer.
Make sure if you are thinking about leasing you determine the following:
- The mileage limit — going over the mileage limits can cost you significant amount of money later. Make sure you think about this carefully.
- Lease termination questions — make sure you find out what rules (if any) apply to termination of a lease agreement before the initial term is ended. You could face a big trap here including a large termination fee.
- Know about the fees — many lease contracts have hidden fees. Purchase options, document fees, and disposition fees can result in significant costs when your lease is completed.
This simply means you should use caution when entering into a lease agreement. It may also be worth your time to understand what laws may impact your lease including what language the dealer should use in detailing the terms of your lease.
Understanding Auto Insurance
It is imperative that you know your state laws pertaining to auto insurance. Whether you are buying a car, or leasing a car, you may be required to maintain full coverage for fire, theft, and collision. Each state typically has requirements for personal injury liability, personal injury liability, and uninsured motorist claims.
Some states have no-fault insurance; this means if you are involved in an accident, your claim will be filed with your own insurance company, regardless of who is at fault.
Remember, comprehensive insurance is more expensive than what you would typically need on a used car without a loan; lenders are interested in making sure security interest is protected.
Does your state tie insurance rates to credit scores?
Only three states – Massachusetts, Hawaii, and California – forbid insurers from basing your car insurance rates on your credit score. Every other state generally allows insurers to consider your credit score when issuing a policy, and setting a price. Keep in mind, a new lease or purchase may result in a temporary reduction in your credit score.
Financing Your Lease or Purchase
In most cases, you should not wait until after you have found a car to buy to search for financing. Much like the steps you go through to buy a home, you should seek pre-approval from a lender before buying a new or used car, or agreeing to a lease. The premise is the same; having a pre-approval gives you more negotiating power. However, regardless of the timing, you need to understand financing your car.
Dealer financing versus bank financing
Whether you make your application at the dealer or you go to a bank, there is something to keep in mind — dealer and bank financing are similar. The big difference is convenience; you are getting the convenience of financing because the dealer has a relationship with a bank.
In some cases, dealers may offer a promotional rate (make sure you check these out carefully). Generally, you may pay a slight premium over a typical bank rate if you go directly through the dealer — you also lose that "personal touch" if you have an existing relationship at a local bank which could be beneficial. Review the terms of the loan offered, check the fees associated with the loan, and find out if one is a better option overall.
Bank financing vs credit union financing
Many of us automatically turn to bank or dealer financing when we are buying or leasing a car. Even a used car dealer often offers financing; but this may not be your most cost-effective option.
If you are associated with, or eligible to join, your best option may be credit union financing. Consumers are often surprised to learn that most credit union financing can result in an interest rate one percent, or more, lower than their local bank.
One of the reasons for this is that credit unions are "customer owned" and they are working on a different margin than their big-bank counterparts.
Find The Right Auto Loan & Vehicle For You
Regardless of what financing option you chose, it is important to read the fine print and make sure the fees involved are not driving up the cost of financing. Doing your homework before you start shopping for a vehicle includes exploring your financing options.