Rev Up Your Knowledge: Navigating the Car-Buying Journey
Contemplating the addition of a new vehicle to your world? It’s an exhilarating chapter, to say the least! That said, the process might spark a gamut of emotions, ranging from the thrill of a new journey to a touch of anxiety about the myriad of choices ahead. Whether you’re magnetized by the sheen of a brand-new ride or the economical appeal of a second-hand gem, the options can be overwhelming. Beyond the vehicle itself, the layers of financing, incentives, and potential trade-ins come into play.
Gone are the days when you had to endlessly haggle or spar with tenacious salespeople. The modern car-buying landscape leans towards transparency, with many dealers favoring fixed prices for a smoother transaction. Yet, before we delve into specifics like horsepower, fuel economy, or the luxury of heated seats, it’s paramount to equip yourself with essential knowledge. This guide is crafted precisely for that – to transition you from a mere shopper to a savvy purchaser. Let’s navigate the highways and byways of car acquisition together, prepping you for a confident journey ahead. Ready to set the course? Let’s drive on!
Should You Lease a Car?
A lot of people will go back and forth on if they should lease or buy a new car. The decision to lease a car shouldn’t be that difficult, and if you follow a short guideline then you will be able to make the decision for yourself.
First, what does it mean to lease a car?
Leasing a car allows you to rent the car for a short period of time, usually three years. Like renting a house, you never own the car, only pay on it for a short bit before getting rid of it and moving on to something else. At the end of the lease, you turn the car back in to the dealership, and then you can lease a new and different car. Lease options are usually cheaper than financing a car over a longer period.
What is bad about leasing a car?
When you lease a car, you never own it. You will never have that asset under your name, and all you will have is a constant liability. The joy people feel when they make that last car payment is a feeling that you will not feel when you lease a car.
However, not everyone holds a car throughout the life of the loan (or the life of the car) so a lot of people will never experience paying a car off. It is interesting that people look down on car leases, but not on renting a home or an apartment.
There are a lot of drivers who would rather have the latest when it comes to cars. If you are buying cars constantly and trading them back in, this can push you underwater on your car loan. For drivers who find themselves always wanting the newest and the best, you should consider getting a car lease.
The biggest caveat when leasing a car is the restriction on miles. You cannot lease a car and then make several cross-country trips. Dealerships will typically limit the miles to 10,000 – 12,000 a year. If you average more miles than that, it is a good idea to not lease. The dealership will charge per mile that you have gone over.
The best way to maximize a car purchase is to hold onto the car until you simply cannot drive it anymore. Leasing cars will pay off in the short run because they have cheaper monthly payments. The longer you would hold onto a car you bought and paid for, the better it is to buy a car.
Another benefit of leasing a car is the ability to buy the car after the lease is done. If you find a car that you absolutely love and don’t want to turn it in after the lease period is up, you may have the option to buy it. The dealership will calculate the residual value of the car and find you a loan to pay down the rest of the car.
The Used Car Pathway: Pros & Cons
Used cars are the next cheapest option when looking to purchase a car. It is no mystery that there is a lot of depreciation in cars. Unlike a house, cars depreciate in price the minute you drive them off a lot. When you purchase a house, you can expect the price to increase over the years.
If you’ve ever had to buy a new car and then turn around and sell the car shortly after, you will understand the hit that depreciation can take. This way, it is almost impossible to make money from a car purchase and sale.
When you buy a used car, you are letting someone else take that depreciation hit. The original car owner would be forced to absorb that financial loss. When purchasing a used car, there is a chance you may be able to buy and sell the car for around the same cost, even after you’ve held the car for a few years.
Right off the bat, used cars are going to be cheaper. This is the original depreciation coming out of the car, making the overall purchase price a lot more affordable.
The biggest disadvantage of buying a used car is that you are buying someone else’s potential problems. You have no idea how the car was treated before you. A used car may require additional maintenance and repairs that you were not counting on.
A lot of dealerships have certified pre-owned cars that go through rigorous checks to prevent selling a car with a lot of problems, and they usually offer a shorter-term warranty to go on top. Used cars coming out of a dealership will be a bit more expensive than buying directly from a person, but it can come with some assurances on quality.
Another disadvantage to buying a used car is the lack of ability to customize the car to your liking. When you buy a new car, you can make sure that you get the color, interior, and features that you want. Dealerships will locate and transport the car that you want to their dealership for you. In some cases, you can buy directly from the company, and even place your car order on a website. When you buy used, you only have available what is on the lot. You may end up having to settle for something that you didn’t exactly want. This happens even more the less time that you have to shop around and buy a car. If you are in a rush, then you may have to make some settlements that you are not happy with. The more time you give yourself to shop for a used car, the more looking you can do.
Diving Deep: The True Cost of 0% Financing
If you’ve ever been sitting at home and watching TV, then you’ve most definitely seen a car commercial offering loans at 0% interest. A 0% interest loan is almost too good to be true. That is just free money waiting to be utilized.
There are no free lunches in this world, so where does the dealership make their money if they have 0% financing?
0% financing deals will usually show up when sales are slow, like in the summer months. This is to help stimulate car purchases and to thin out the dealership’s inventory before getting in the next year’s models. 0% deals are not bait-and-switch schemes, but they do drive people into dealerships who don’t qualify for the offer.
To receive a favorable interest rate, you need good credit and a long credit history. Very few people will qualify for this deal, but that is the idea. You come in, fall in love with the idea of getting a new car, find that perfect car, and then after your emotions are running sky-high, you find out that you can’t qualify for the 0% interest rate loan.
But even if you qualify for a 0% interest rate loan, is it always the best deal? The dealership still needs to make money, even if you are one of the few that qualifies for the deal.
There are several ways a dealership can play with the numbers. First, they can adjust the interest rate they will offer you. This is the easiest to see – a 5% interest rate doesn’t sound nearly as good as a 2.5% interest rate.
The next thing they can do is change the purchase price. The purchase price is a nice number to focus on, but without considering the interest rate, this will not be the final number that you pay.
The next item that a dealership will play with is the cashback and bonus options. These bonus offers can be the key to getting yourself a good deal.
The last thing a dealership will do is change your trade-in value. If you are trading in a car to get a new one, this will give them one more lever to pull to get their price. Having a trade-in is easy to handle. You don’t have to worry about listing your car, meeting with potential buyers, and then doing the paperwork to complete the sale on your own. This does come at a cost, though, and typically you will not receive the same amount of money when you trade into the dealership. Dealerships understand the cost of this convenience.
You are sitting in the tiny office of the salesperson. You have finally settled on your price, and after making a down payment, you are going to walk out with a $30,000 car. Great! You are feeling good that your tough talk and walk-out attitude finally got them to see the error of their ways and give you the price you want.
Now, your salesperson is running back and forth to their finance manager trying to work on the terms of the loan.
Your salesperson returns with options.
One, you can take a 5-year loan 0% interest, or you can take a 5-year loan 5% interest but with a $5,000 cashback option.
Which one do you take?
To figure this out, you need to evaluate the total cost for both loans. The first one is easy; you know the 0% interest rate is going to cost you a total of $30,000. The 5% loan will cost you a total of $28,307. You will save $1,693 for taking the 5% interest option.
In this example, if the cashback bonus is over $3,500, it makes more sense to take the higher-interest loan.
What makes the higher-interest loan even better is the fact that you can hold the loan for a while and then try to refinance it for a lower interest rate.
Exploring External Financing Options
So far, we’ve talked about working with the dealership directly when buying a car. However, you are not forced to use the dealership when considering your loan options. You can seek out an auto loan from a bank or credit union and bring that information to the dealership.
If you bring in your own loan, the dealership is going to lose some levers to pull. They will lose the ability to adjust the terms and the interest rates. Now, they will only be left with trade-in value and bonuses. You better believe that these are going to be adjusted to be more favorable for the dealership when you decide not to use their lending department.
Understand that if you are working with a better deal, then you must look at the total cost of your loan plus what the dealership is offering in terms of trade-in value and bonuses.
Mastering the Car-Buying Journey: A Step-by-Step Guide
- Define Your Car Criteria
- Purpose: Decide whether you need a commuter, family car, luxury vehicle, or a sporty ride.
- Features: Prioritize must-have features like safety, tech specs, space, or fuel efficiency.
- Establish a Budget
- Total cost: Consider not just the car’s price but also insurance, taxes, registration, and possible future repairs.
- Financing: Understand how much you can afford monthly and overall.
- Deep Dive into Research
- Expert reviews: Get insights on performance, reliability, and common issues.
- User experiences: Understand the long-term pros and cons from existing car owners.
- Resale value: Check how the model holds its value over time.
- Explore Financing Options
- Credit score review: Know your score before approaching lenders.
- Loan shopping: Compare terms from banks, credit unions, and online lenders.
- Interest rates: Understand the current average rates for new and used cars.
- Visit Multiple Dealerships
- Inventory variety: Different dealerships may offer various trims or promotional deals.
- Build rapport: Establishing trust with a salesperson can lead to a better deal.
- Don’t buy on the first visit: This gives you leverage and time to think.
- The Test Drive
- Multiple models: Even if you have a favorite, drive comparable models to make an informed choice.
- Real-world conditions: Try city, highway, and challenging terrains if applicable.
- Pay attention to comfort, noise levels, handling, and tech usability.
- Negotiation: Art & Science
- Be informed: Know the fair market value of your chosen model.
- Be prepared to walk away: This might lead the dealer to offer a better deal.
- Trade-ins: Understand the value of your old car if you’re considering a trade-in.
- Understanding the Contract
- All terms: Ensure the contract reflects all previously discussed terms, including price, interest rates, and warranty.
- Fees: Question any unexpected fees or charges.
- Cancellation policy: Know if there’s a cooling-off period or any return policy.
- Closing the Deal
- Final inspection: Give the car a last look to ensure no damages or changes occurred.
- Required documents: Ensure you get the vehicle title, bill of sale, and other necessary paperwork.
- Make the payment: Whether a down payment for a loan or full payment, secure the deal.
- Post-Purchase Actions
- Insurance: Ensure you have the required insurance coverage.
- Maintenance: Regular check-ups, especially in the first year, can prevent bigger issues.
- Stay in touch: A good relationship with the dealer can be beneficial for future services or deals.
The world of vehicle procurement can be a maze, but understanding your priorities can illuminate the path ahead. If your heart is set on the latest models and minimal mileage isn’t a concern, leasing offers an attractive avenue. On the flip side, if longevity and ownership resonate more, perhaps venturing into the used car market makes sense, balancing affordability and your specific preferences.
Remember, while dealerships have their strategies, you’ve got the driver’s seat when it comes to knowledge and negotiation. Whether it’s assessing incentives, understanding the intricacies of interest rates, or evaluating trade-in proposals, a holistic view of the total cost is your compass. And don’t forget, the journey doesn’t end with the initial agreement. With options like loan refinancing available, there’s always an opportunity to revisit and refine your deal. In essence, embrace the experience, stay informed, and chart your unique course to vehicle ownership or leasing. Your ideal ride awaits!
Financing: The act of obtaining a loan to buy a car. This typically involves interest and can be from a bank, credit union, or the car dealership itself.
Credit Score: A numerical representation of a person’s creditworthiness, based on their credit history.
Resale Value: The estimated amount that a car can be sold for after being used.
Loan Shopping: The process of comparing loan offers from different lenders to find the best terms.
Interest Rates: The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage.
Inventory: The cars that are currently available for purchase at a dealership.
Trade-ins: A transaction in which the buyer offers a vehicle they own as partial payment for another vehicle.
Fair Market Value: The price that a car would sell for on the open market.
Vehicle Title: A legal document proving ownership of a vehicle.
Bill of Sale: A legal document that confirms the transfer of ownership of goods, in this context, a car.
Insurance Coverage: Protection against financial loss due to unforeseen events, such as accidents, theft, or damage to the vehicle.