For young adults, buying a car is a major purchase. Being a first-time car buyer can be daunting for many reasons. While the best way to learn is by doing it, it could prove quite costly, to the tune of thousands of dollars, with mistakes affecting financial stability and credit ratings for years altogether. So, if you’re new to the world of financing and credit, learning some important tips can help a great deal.
here are some important auto financing tips you should know before buying your first car.
1. Considering alternative financing options
Most first-time buyers take out auto loans, with many choosing to employ the dealer’s lenders. However, know that you can look for and find your car loan with third-party financing, which will almost always turn out to be cheaper. First-time buyers who have savings or checking accounts can ask their banks about their car loan options, post which they can ask local credit unions to see in case they offer lower interest rates. Shopping for alternative financing options with two to three different lenders is always better. This is an important auto financing tip.
2. Negotiating prices
First-time buyers need to learn how to negotiate, irrespective of whether they’re buying the car from a dealership or a friend. Negotiating can help first-time buyers save thousands off the total purchase price and, in many cases, even save them from overpaying. What do first-time buyers need to do? Well, firstly, they need to look up the car’s value on sites like Edmunds and Kelley Blue Book and add value for extra features too. Once one has a few estimates in hand, subtract 10–20% before giving the offer to the seller. If first-time buyers are buying the car in cash, they can and need to use that as leverage too. One also needs to keep in mind that salespeople at private dealerships often have monthly sales targets, so they would be willing to make a deal.
3. Considering realistic monthly payment targets
First-time car buyers often shop based on monthly payments, when in fact they should be considering their entire transportation budget including running costs. It is easy for first-time car buyers to be attracted to zero-down payment offers, low monthly installments, and longer financing terms. However, these tend to hide the true cost of the car, and do not account for overall running costs such as car insurance, repairs, scheduled maintenance, and regular refueling costs. This results in higher depreciation, poor fuel economy, increased repair costs, and lower resale values. This is a great auto financing tip for first-timers.
4. Going in for long-term financing
Another big mistake that first-time buyers make is accepting longer-term payments to lower the monthly payments, rather than going in for a bigger down payment. While the monthly payments become lesser, it ends up increasing the overall cost of the car. So, if a car loan of $25,000 @ 7.0% for 36 months is taken, it costs $27,789. However, the same loan paid over 72 months ends up costing $30,688 – as much as $3,000 more. So, one needs to save for a bigger down payment to pay off a huge chunk of the principal amount, and going in for a shorter finance term.