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Family Finances

How to Buy a Car

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    • FNBO

      Nov 18 2022

How to Buy a Car

Whether you’re planning to purchase your first car or your next one, it’s a big financial decision and one you shouldn’t rush into. Not only do they cost a lot of money, but your selection may impact your daily life and your wallet down the road. The process of purchasing a new ride can feel overwhelming, but this article walks you through how to buy a car with a few simple steps.

Determine How Much You Can Afford

Take a good look at your budget to determine how much you can afford to pay for your next vehicle. If you don’t have already have a budget, be sure to create one before you get started.

You can make this determination through a couple different methods:

  • By Calculating Your Maximum Monthly Car Payment.
    Many experts recommend spending less than 10 percent of your take-home pay on your car payment and no more than 20 percent total between your payment, insurance, and maintenance. You may be able to afford more or less than 10 percent depending on your financial situation.

    The average term on a car loan is 72 months (six years). However, you can choose to finance for shorter or longer time spans. In general, the longer the term, the higher the interest rate, but your payment may be lower be because the car’s total cost is spread out over more payments. Keep in mind that longer the loan term, the longer you will pay interest, which will likely cost you more in the end.

  • By Determining if the Total Price Aligns with Your Lifestyle and Budget.
    If you are not concerned about maximum monthly payments, the total price of a car, including taxes and interest, may be the better way to view affordability. If you’ve ever heard the saying “just because you can afford something, it doesn’t mean you should,” it applies here. There may be instances where you can afford the monthly payment (or even pay cash) for a car but purchasing it may not be in-line with your financial values. For instance, you might believe that a $20,000 vehicle gets you from point A to point B just as well as a $40,000 vehicle so you’ve determined that anything over $20,000 is not affordable for you. Along the same lines, once you see the total price of your vehicle over time (with taxes and interest), you may decide it’s simply too much to pay and opt for something less expensive.

Regardless of how you view affordability, there are other scenarios to consider as well:

  • Do you have a down payment to put toward the purchase of your vehicle?
  • Do you have an existing vehicle you plan to sell or trade? If so, how much do you expect to get for the sell or trade?
  • Do you plan to buy or lease your vehicle? If purchasing a new car, lease payments tend to be lower than if you were to purchase the vehicle.
  • Will you be using cash to pay for your vehicle, or will you be financing it?

Other costs to consider as you determine how much you can afford include:

  • How much will it cost to insure your new car?
  • How much will you spend on gas each month?
  • If the vehicle doesn’t come with a warranty, do you plan on buying an extended warranty or anticipate it will need any repairs in the future?
  • What will it cost to license the vehicle in your county?

Get Prequalified and/or Preapproved for a Loan

Before you start shopping for your new vehicle, it’s important to get prequalified and/or preapproved for your loan. This will demonstrate to the dealer that you’re a serious buyer and may help ensure you get the best financing possible. Shop around at various financial institutions to find the best rates and terms. Then contact the financial institution via phone, web, or in person to start the process.

What Does It Mean to Get Prequalified?
Prequalification is the process of sharing your financial information with a lender to determine approximately what the terms of the loan could be, including how much you can borrow and the interest rate. Prequalification does not trigger a hard credit check and is not an agreement to fund a loan.

What Does It Mean to Get Preapproved?
Getting preapproved is considered a loan application that has been approved. The preapproval process does trigger a hard credit check and will result in an offer from the lender for a specific loan amount and rate that is generally good for 90 days.

Research and Narrow Your Vehicle Options

Write down the vehicle features that are most important to you. Features to consider include:

  • Do you want an SUV, pickup, minivan, or a two- or four-door car?
  • Are you wanting to purchase a new or used vehicle?
  • Is there a car brand and/or model you prefer?
  • Is fuel-efficiency important to your and/or are you seeking an electric vehicle?
  • Which safety features matter most to you?
  • Do you live in an area where four-wheel drive or all-wheel drive is important? Or will two-wheel drive suffice?
  • How much cargo space do you need?
  • Do you need towing capability?
  • Which technology features are a must for you?

Next, rank the features in order of most to least important. Then, start researching the different vehicles available in your price range that include highest ranking features on your list.

Start Shopping

Now that you know how much you can afford, which features you want, and are preapproved for your loan, it’s time to start shopping. Take some time to view the inventories of several local and online dealerships to get a good idea of what is available. Be sure to educate yourself on the true market value of your desired car by consulting edmunds.comKelley Blue Book, or any other vehicle valuation company to determine a fair and realistic price. If you have the time, watch the inventories for sales and other incentives to help lower your cost.

Contact the Dealership and Start Negotiating

Once you’ve found the right car for you, it’s time to contact the dealership and start negotiating. First, confirm the vehicle you have your eye on is still available. Next, let them know you’re interested and start the negotiating process. Make sure you are aware of any current rebates, incentives, or special financing deals the dealership is offering.

If you’re trading in your car, let the dealership know so they can determine a trade-in value you both agree on. Also, make sure you’re aware of any taxes and fees related to your deal upfront. Finally, watch out for the extended warranties and paint protection that dealers often try to sell. These huge revenue generators for  dealerships are costly to customers and may offer little value in the long run.

If you have questions about purchasing a new vehicle, getting prequalified or preapproved for an auto loan, or any other banking needs, a Personal Banker from FNBO would be happy to answer them. Give us a call today.

The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.