So you want to buy a car!? You’ve seen Dan Bilzerian’s recent Instagram photos and have already binge watched all seasons of Top Gear. Not only that, but you’re sick of driving your mom’s minivan to work. All things considered, it is time you had a little hot rod all for yourself. The only problem: now that you are living on your own, you have to pay for the car on your own as well. For most of you, this will be the first big purchase of your life, and this will be very exciting. One of the many milestones into adulthood is buying your first whip. While fulfilling this dream may bring you back to childhood, it will be very important to think maturely and be well informed in making this important financial decision. Below are some things you need to know before taking this step:
- Talk to your bank about financing a car. Talking to a professional should be your first step. Being experienced with clients who have been in the same position, they can work with you to analyze your past statements and finalize a budget. You will want to know exactly what term you are able to afford, with the appropriate interest rate and how much you can fork over for the down payment. This step is crucial because in theory, as long as you are making money, you can afford any car with a loan. However, the amount you are making and/or able to pay forward will dictate just how long the term will be. In this sense, the longer the set term, the smaller the payment amount. However, the smaller the payments, the longer you are paying interest on the loan. A five year loan payment vs. a three year loan payment could be the difference of $200. This is something to strongly consider. Buying too expensive of a car may not take priority over other expenses you have to pay, no matter how long the term or how small the monthly payments. This leads me to my next point.
- The price of the car isn’t the only cost you will have. Lest you forget you have to afford the interest, car insurance, gas and maintenance on the car to keep it running smoothly for the entirety of your ownership. When considering the cost of the car all of these factors must be remembered. Choosing a car in your price range is crucial and this price range should be determined keeping these other equally as important factors in mind. Just because all of your friend’s parents bought their kid a 3-series BMW, does not mean you can afford one yourself.
- Car payments and loans have two parts: interest and principal. The principal is the amount you need to pay off the car or the balance. The interest is the additional cost of borrowing money. The APR is the rates, fees and other costs that come with the loan in the form of an annual percentage rate. My rule of thumb is three years; if it takes you longer you can’t afford the car.
- When you want a loan you basically have two choices: dealership loans or bank loans. You will almost always pay additional interest if you go through a dealership. The dealer will get the loan through a bank, so they are just a middleman. That is why I suggest going straight to the source.
- When you go see a lender, he will be assessing your credit score and credit history in order to make sure you will be able to pay off the loan. Essentially, the lender will be analyzing and predicting your future cash flows and budgets. If you have bad credit, you will likely pay higher interest rates or you may even be denied a loan. If a bad credit score is your reality, you will likely have to put a generous down payment on the car. The ability to pay a percentage upfront demonstrates to the bank that you are financially responsible which could help to lower your payments. When you are approved for a loan, the bank hands you a check to pay for the car and you will soon owe the bank a payment each month. Your new car will become what is called ‘collateral.’ In case you can no longer afford the monthly payments, the bank can seize your car to recover the money that is owed. Having the bank take your car will not only leave you riding a bike to work, but it will destroy your credit score, which will strongly decrease the likelihood of you ever being able to borrow money again. I know this sounds serious, but being a financially responsible adult is serious business.
- Read consumer reports. In order to minimize these external expenses, you may want to consider a car that is more reliable in terms of average breakdowns or miles to the gallon. Legitimate consumer reports could help you save significantly. As long as looking at the resale value of certain cars.
- Consider the pros and cons to buying a new vs. a used car. New cars have lower interest rates, but lose intrinsic value almost as soon as you drive the car off the lot. When the back tires hit the road, you have already lost up to a few grand. Buying a used car may mean that you can afford the quality brand you trust and essentially get more for your money. Buying new from a dealership usually means you have to pay for a salesman commission on top of the price of the car.
- Be a savvy negotiator. The marketplace is still a marketplace, and therefore the concept of sales will apply. Many times salespeople have more leeway in terms of prices than they initially give off. These bottom line prices tend to be far below the advertised price of the car. This is important to keep in mind if you find yourself feeling pressured by a sales employee to buy a specific car. In actuality, you could put pressure on the salesman and turn things around, by negotiating and trying to get the lowest price available.
Lastly, make sure you take care of resale value, change the oil, rotate the tires, don’t drive recklessly, put a protective coat of wax on your car, and change the air filters regularly to keep mpg high. This will also save you a lot of money. So if you are buying a car, enjoy your new whip but be smart with your money at the same time! It will all pay off down the road, literally and figuratively.