When, What ,Who and How!
Between the last week of the year, the first couple of months of the new year, and even mid-year are easily the best time frames to snag the latest car models at an affordable price. Dealers scramble at the end of each year to get rid of “last years” model before the suggested retail price drops. During these times, dealers need to make more space for the New Year Models. If you are in the market to buy a car, there are several things you NEED to know before attempting to buy your first car. First, You need to know how buying a car works. The most important components you want to consider are your interest rate, your credit score, and the final price of the automobile. Each have a domino effect on the next element when you are trying to determine your payment amount.
What You Don’t See
How buying a car works. Today, a typical car that’s less than 3 years old will cost you about $15K and higher. Unless you have that type of cash on hand, you are more than likely going to finance your vehicle. This means acquire a loan from the bank. The bank and the car dealership are two different entities. The bank and the dealership have a mutual business-to-business partnership. A dealership, more than likely, has partnerships with multiple banks for competitive rates. The dealer attracts potential customers for the banks, the bank pays the dealer for the vehicle on your behalf, and in the end.. you now owe the bank. Never get it confused…The dealer/sales man job is to sell you a car at the highest price for his commission. Nothing more.. nothing less. The salesman (in theory) is NOT your friend, so remember this before you start to negotiate. Here are factors you want to consider:
1. Value and Price
First and foremost, The first thing to take into consideration when buying a car is the overall price of the car because this directly determines how much you will be financing/ borrowing. Step #1 in determining the price is… always ask the dealer/ salesman “what does this car appraise for?” this simply means… what is this specific car worth. Just because the car is shiny and is one of the latest models doesn’t mean it appraises at Top dollar. Factors of depreciation has to be considered such as condition, mileage, interior, features , engine size etc. Always check at what mileage was it last appraised. You can also go to KelleyblueBook.com (kbb.com) to get a quote for the model’s market value according to its condition .
Next .. Always negotiate the overall price of the car. This means, try to purchase the car underneath the value of the car . In other words, get a discount. You have more buying power than you would imagine. Cars depreciate …fast. A lot of sneaky car salesmen will up-sale a car higher than what it is worth. If you are misinformed, you will accept it. Go head to head with the salesman. Don’t give up or in. They can easily discount the price of the vehicles up to thousands of dollars. When in doubt, just walk away. The last thing they want is to see their commission (you) walking back out of the front door. Don’t appear desperate or enthused. Beware of friendly, overly compensating strategies used by salesmen to gain your patronage. ( Example: Your favorite color is Red ??? So is minnnnnnneee!). This was confirmed to be a technique to me by a NC State Top Salesman with so many sales, He received a SUV for free from one of the top two U.S car brands.
2. Financing Options
After you have negotiated the price that you will be buying the car at, finally you want to determine the portion you will be borrowing from the bank. For example, if the car costs $22,000. Seek to get your discount, and buy it for 21,000. Next, you want to minimize the amount of money you will be borrowing from the bank as much as possible for the best interest rate possible. For instance, you’ve just talked the slimy car salesman down to selling you the car for $21,000. Now you want to make a down payment of $3,000 on your vehicle to finance only $18,000. This will reduce your monthly payment. The dealer will proceed to run your credit to find an approving bank. It is a good idea to consult your own bank for pre-approval. This allows you to prevent the dealership from doing multiple pulls on your credit.
Interest rates: The interest rate is the most important factor because it directly influences the amount of your payment . First and foremost, know the going national rate for car loans. Interest rates are determined by so many factors. The main factor that influences interest rates is your credit score. If you have a fair credit score of 610-674 , expect an interest rate ranging from 6%-8.99%. If you have fairly good credit to excellent credit (680+), expect an interest rate ranging from 2.99%-5.99% . The lower the interest rate… the better. ( These stats are based off current rates at the time of publishing). Also, the year of your car affects the interest rate. Older cars (5 years old or more) are bigger risks for the banks so they have higher rates starting at around 10%. “No credit” applicants have high interest rates among 15% and have a higher chance of getting older model cars. Also beware that dealerships can add points to the interest rate as a referral fee for banks . For example, the bank may only want 2.74% but the dealer will tell you 3.74% and collect the 1% from the bank. These are called dealer mark-ups. Negotiate your interest rate!
3. Terms of The Contract
The last contributor to the amount of your car payment is the length of the contract (number of terms). The average length of time chosen to repay is about 60-72 months. The longer you choose, the lower your car payment will be but keep in mind interest will still accrue increasing the overall price of what you actually pay for the car. Your total cost can be determined by adding the interest (finance charge), and the price of the car. Example: So if the car costs $18,000 + Total Interest $6,000= You actually paid $24,000 for the car by the end of your contract .
Unnecessary features: Beware of car salesmen fishing to sale you meaningless features at the signing. These features are added to your purchase price and can increase the amount financed. It’s pretty much how a fast food restaurant asks if you would like fries with that shake to increase sales. Remember you and the car salesman are not on the same team. Their job is to get your final bill as high as possible for their own commission and the sales number of the dealership. The only features I’d recommend are tire protection, and gap insurance. Tire insurance protects you from paying $200 for a flat tire. Newer cars’ tires can be expensive. The tire protection may cost about $500 more but it ensures protection for the majority of the life of your loan. You can add it to the loan or pay for it outright. Also the Gap insurance protects you from being upside down on your loan.
Cars depreciate quickly. Sometimes depreciation can outpace your auto loan. For example, You borrowed $18,000 for a car and you have an accident. At the time of the accident, your car is only worth $13,000. Your insurance company will give you a check for $13,000. However, you will still owe the bank $5000 ($18,000-$13,000). Gap insurance covers that gap in between the value and what you owe on the loan. This may cost about $500 but it protects you for the entire loan. These are the only features I’d value adding. Tags and title can also be added to the loan or paid for outright.
Before you Sign, Review Your Contract
Always read the terms and conditions of your contract with the bank. Most importantly, you want to be able to pay your loan off asap. Make sure there is no prepayment penalty for paying off early. I’d recommend adding additional principal over the life of the loan to shorten the term. For instance if your payment is $375, occasionally pay $400. Some banks allow you to pay payments in advance. Each bank agreement varies.
You now know all you need to know to get a great deal. Just stick to this info provided . The most important thing when entering any financial contractual agreement is knowing every aspect of what you are signing up for. If you’re okay with a high payment, just know how the total came to that amount. Keep in mind you will pay that high payment for the rest of the loan even when that car isn’t so shiny or new anymore. Think before you act. A car is an investment, guard your investment by continuously educating yourself. Knowledge is the greatest weapon and protection of your wealth. Subscribe for more, top of the line money managing tips.
See how a car affects your credit… Read Give Me Some Credit!
(Photo Provided by D Burton Photography)
