Car buying mistakes to avoid
But you shouldn’t have to push their financial limits just to purchase a new car. To avoid signing up for a future you can’t afford, avoid making these common mistakes.
Taking the first loan you’re offered
Car loan pre-approvals depend largely on your credit score. If you have good credit, say anywhere from 780 to 850, you could expect interest rates of about 4.8% on a new car. For those with credit scores in the 300s to mid-600s, you’re looking at rates anywhere from 8% to 13.5%. The catch is knowing not to fall for dealerships offering monthly loans with ultra-high rates. And it’s even more important not to agree to offers where interest rates start out low and then, after refinancing, skyrocket.
But keep in mind that high-interest agreements usually mean you end up paying far more for the car than it’s even worth. And should you happen to experience an unfortunate life event like a health crisis, divorce or job loss, you could end up needing to sell your car to make ends meet. If your car’s value has dropped significantly, you may find yourself without a vehicle and strapped financially after selling it at a loss.
The trick is to shop around before committing to anything. Use online sites and talk to multiple dealerships and lenders to ensure you’re getting the best deal. From there, use a car payment calculator to figure out exactly what you can afford each month. Knowing your budget means you can confidently accept or reject offers from dealers.
Then, once you ask for the “out-the-door” price from the dealer (the complete amount you’ll pay for the car, less insurance, maintenance and other ownership-type costs), you’ll know exactly what’s affordable and what’s not.
Assuming a longer term is better
You’ve got your pre-approved loan and you’re ready to sign on the dotted line for a car you can comfortably afford but then the dealer suggests extending your loan in order to buy a more expensive car. He offers to lower the payments to match your budget, which means you’ll just owe for a little longer. Simple, right?
Not really. As tempting as it might be to take a longer-term offer with lower monthly payments, think about how your life might change over that term. Will your financial situation change? Is your job stable? Will you need a new car again in a few years?
Furthermore, with a longer term, you’ll likely end up paying more for the car than it’s worth.
Then, say you want to buy a different car in a few years, best of luck trying to convince a dealer or private seller to pay you what the car originally cost you.
And if you want to trade in your car with a lender? You’ll still have to pay the difference between your current vehicle and the newer one. If you’re making a major upgrade, the lender might suggest rolling your old loan into the new one, again at a potentially higher rate and longer term.
Get in front of this problem by making sure your loan has been paid in full before you start looking for a newer model.
Once that’s done, as with any big purchase, remember to do your research and shop around. Use online car calculators, visit multiple car lots and keep your budget in mind at all times.
Finally, don’t forget to recalculate as your finances change. Your budget today might be different from your budget months or years down the road.
More: Estimate your monthly car payment
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