There’s nothing quite like that new car smell. Buying a new (or new to you) vehicle can be a fun and exciting time, but it is also an important financial decision. Knowing this, auto shoppers can be left wondering how they should prepare for their vehicle purchases before they hit the lot.
Check out these four crucial considerations for your next vehicle purchase.
A vehicle is the second-most expensive purchase many people will ever make—right after their homes. All too often, buyers rush through the car-buying process only to be left frustrated with their purchases a few months later. Is your garage big enough to store a pickup? Are you ready to pick up the additional gas expenses associated with an SUV? Will that sub-compact really have enough space to fit everything and everyone you need to transport on a daily basis? These are the questions you need to ask yourself before you make the purchase. Contemplate what you will need to use your vehicle for, and find one that hits the sweet spot of price, utility and personal preference.
Just as buyers tend to rush through the process before considering the practical implications of their decisions—they may also commit to more than they can pay. Buying a vehicle with cash is the least expensive way to purchase, but that is not always possible. Instead, financial pros recommend the “20-4-10 Rule.” This states that, when you purchase your vehicle, you should pay 20 percent down on a loan whose terms are no longer than four years, and the associated monthly expenses should not exceed 10 percent of your monthly income.
Note that “expenses” includes more than just your monthly payment. When calculating what you can afford, include the principal loan payment, the interest payment, your insurance and registration costs and gas. It’s also important to use your net income instead of your gross income. Simply put, your net income is the amount of money that is actually deposited into your account every month. Calculating what you can afford based off your gross income, or the money you make before taxes and withholding, is a surefire way botch your budget and end up owning more car than you can truly afford.
When it comes to auto loans, there are two broad categories of financing: direct and indirect. Indirect financing is financing that you obtain by financing your loan through the dealer. These are tricky, because the dealership isn’t actually financing the purchase; they’re selling the loan to the bank for financing. This is called “indirect” financing because the loan doesn’t come directly from the dealer. These loans generally end up costing the buyer more because the dealership can mark up the interest rate offered by the bank and keep the difference. On the other hand, direct financing is financing that comes straight from a lending institution—such as a bank or credit union. When searching for lending options, you’ll want to find an institution that you’re comfortable with, one that can provide low rates and special offers on auto loans.
Another key component to take into consideration is your credit score and your credit history. Your credit history is a reflection of the times that you have borrowed money from a lender and how diligently you have made your payments. Your credit score is a numerical representation of your credit history that is regularly updated. For those with a solid credit history, their repayment history will likely work to their benefit during the auto-loan process. If your credit history has clear room for improvement, you may have fewer options in terms of loans for which you can qualify—which places a limit on which vehicles you are able to purchase.
When buying a vehicle, there’s a set of standard concerns that most purchasers have. They want to know what they can afford, they want to know what it will end up costing and they want to know how to get the best deal. However, the purchase process isn’t the same for everyone. The concerns that you have and the things that might be holding you back may not be the same as they are for others. That’s why, as you’re stepping through the purchase process, it’s important to take mental notes about your apprehensions. If you’re concerned about the cost, the details of the loan or the vehicle you are buying, you can make adjustments until you are comfortable with the agreed terms.
Whether it’s a brand-new SUV loaded with gizmos and gadgets, a cruise-worthy motorcycle or a nice, reliable sedan, buying a new car is a significant financial decision. Sioux Falls Fed can walk you through the financing part of the equation. Let’s talk.