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Your First Car Loan : What You Need to Know
So that bucket of bolts you drove throughout high school and college has gasped its last exhaust-filled breath. It’s done. That means you’re in the market for a new car. Soon you’ll brave the treacherous world of the car lot. Be careful, it’s a jungle out there. Eager salesmen hover like vultures, ready and willing to separate you from your hard-earned cash.
Once you decide on a car, you’ll then have to survive the depths of the dealership, where finance managers lurk at every corner—pen and paper in hand, waiting for you to sign on the dotted line. But don’t worry, with a little prior planning, you can get that new car without breaking the bank.
First off, you need to make a decision: buy or lease? If you like to drive a car until it dies—and with today’s autos running well past the 100,000 mile mark—then you’ll probably want to buy. However, if you see yourself in a different ride every couple of years, then leasing might be the right option for you. In a lease, you’re essentially renting the car for a pre-determined amount of time (usually three years). During that time, you’ll have to keep the car in tip-top shape and only drive it for an agreed-upon amount of miles per year (usually around 15,000). After your lease is up, you can purchase the car at a residual price or start a lease on another car.
Once you decide on buying or leasing, it’s time to figure out how you’re going to pay for it. First, decide how much you can afford to spend on a new car. As a good rule of thumb, many experts suggest that you spend no more than 20 percent of your net income per month on a car payment and other related auto-expenses.
Next, decide how you want to pay for it. Once you’re on the lot and fall in love with your dream car, the salesperson will do everything in their power to get you to finance the car through the dealership. Auto financing is a big money industry, and car manufacturers would be remiss to not take advantage of it. Financing with the dealership is tempting, as it’s the quickest way for you to drive off the lot in your new set of wheels.
But buyer beware, dealers know that buying a car can be a mentally exhausting experience, and finance departments will often add hidden fees in the paperwork for services or features you don’t want (e.g., extended warranties, service agreements, etc.). Dealerships also offer attractive financing deals like rebates or low interest rates, but many of them depend on your credit score—which you should always know before you even step foot on the lot. You can check your credit score and correct any errors by visiting www.equifax.com, www.experian.com, or www.transunion.com.
If you want to be a truly empowered car buyer, then secure a loan through a bank, credit union or other lending institution before you buy. You’ll generally get a lower interest rate than what the dealership can offer you, and you’ll essentially become a “cash buyer”. This means you’ll have more negotiating power on the total price of the vehicle, lower monthly rates, and no chance of the dealerships finance department sneaking in any hidden fees into a finance contract. Most lending institutions, upon approving your loan, will give you a check that can be made out to a dealership. Negotiate the price of the car along with tax and licensing fees, and off you go.
Whether you lease or buy, finance through the dealer or through a separate lending entity, always read every contract that requires your signature thoroughly. Make sure the figures in the contract are correct and that you understand all of the charges included. Also, if at any time you should feel pressured by a car salesman or lending agency, walk away. Remember, you are the buyer, therefore you have the power.
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