Whether it is on the side of the highway or on TV – advertisements for car dealers, sales and incentives are hard to miss.
But purchasing a new or previously owned can should not be decided rashly. Buying a car is a significant purchase that you will be paying for and living with for years to come.
“Car buying is a big undertaking and for some the first major purchase of their life,” said Fernando Fernandez, certified financial counselor and vice president at Fort Hood National Bank.
It is essential to determine a reasonable budget and check the market before heading to the dealership.
“Create a budget that includes not only your monthly car payment but all associated costs such as gas, maintenance and insurance,” he said. “Once you have this information, stay within this budget. It is recommended to not spend more than 10% of your net income on a car payment.”
“Gather the information you need to ensure you aren’t paying too much for a vehicle,” he said.
Knowing your financial resources and reasonable prices for the vehicles you are interested in puts you in the best position for negotiations with car dealers.
Fernandez recommended to stick to your plan when heading to the dealership and to keep in mind that sales are not always a good alternative.
Just because a car is on sale doesn’t necessarily make it a smart buy. Cars are often only on sale because the market has decided they’re not worth their full price.
“Make your decision carefully and deliberately based on the information you’ve gathered,” he said. “Do not let emotion or sales pressure lead you to a purchase that you can’t afford in the long run.”
Consumers should apply similar techniques to determine reasonable interest rates on car loans, which can vary widely.
“Many factors affect the interest rates on car loans,” Fernandez said. “The current market, the age and mileage of the car, the credit history of the borrower all play a role in determining the risk to the lender and therefore the rate charged on the loan.”
While individuals with limited or no credit can be offered rates above 20%, borrowers with a long credit history of consistent payments can see rates near 0%.
Fixing bad credit before applying for a loan can improve your chances of receiving a lower interest rate.
“You can always seek to refinance the vehicle later as your credit score improves, but be careful,” Fernandez said. “If you have accepted an extremely long term, you may find yourself ‘upside down’, meaning you owe more on your current loan than the vehicle is worth.”
This will decrease the chance of refinancing at a lower rate as your credit improves.
But before agreeing to any kind of loan, make sure to compare all options for financing your car.
“Just as you will choose the car and dealership based on which one gives you the car you want at the best price, you should choose the financing option with the terms that best meet your needs and keeps you within your budget,” he said. “Don’t be afraid to force lenders to compete for your business.”
Car buyers who need to purchase a vehicle immediately but don’t have established credit can use a co-signer to make a deal.
“This allows you to finance the vehicle based on the co-signers credit history,” Fernandez said. “However, if someone agrees to co-sign your loan, he or she is equally responsible to ensure you pay in full and on time.”
In the end, research is the key to smart car buying.
“Do your research to ensure you know your budget,” he said. “Do your research to ensure you are buying a good vehicle at a fair price. Do your research to ensure you are getting the best financing for which you qualify.”
Financial advisers can help you find a reasonable budget and find affordable options for car purchases.
“Do not hesitate to seek advice from a financial counselor to ensure you make the best-educated decision and save money,” Fernandez said.