New cars today have better safety features and more high-tech than did models a decade ago. And let’s face it: Trading in a battered clunker with filthy chairs is a tempting idea.
But many Americans make the big mistake of buying a car. Buy a new car with one transaction. One-third of buyers transfer an average $5,000 debt from their last car into their new loan. They are paying for a car they don’t drive anymore. Roaring! It is not a winning personal finance strategy.
But don’t worry – NPR’s Life Kit is here to help. Here’s how to buy a car without going into debt or paying more than you should.
1. Get pre-approved for a loan before you set foot in the dealer’s shipment.
“The best advice I can give people is to get pre-approved for a car loan from your bank, a credit union or an online lender,” says Philip Reed. He’s the automotive editor at personal finance site NerdWallet. He also worked undercover at an auto dealership to learn trade secrets while working for car buying site Edmunds.com. So Reed will pull back the curtain in the car buying game.
For one thing, he says, getting a loan from a lender outside of an auto dealership causes buyers to ponder an important question. “How many cars can I buy? You want to do that before the salesperson loves the limited model with a sunroof and leather seats.”
Reed says getting pre-approved also indicates any problems with your credit. So, before you start shopping for a car, you may want to boost your credit score or get false information off your credit report.
And shop around for the best price. “People are being charged more interest than they should be based on their creditworthiness,” said John Van Alst, an attorney with the National Consumer Law Center.
Van Alst says many people don’t realize it, but agents are allowed to increase the rate they give you higher than what you’re actually eligible for. So with your credit score, “you could be eligible for 6% interest,” says Van Alst. However, he says, the agent may not tell you that and give you a 9% rate. If you make that bad deal, you could end up paying thousands of dollars more in interest. Van Alst said that its agent and finance company, “they’re going to split that extra money.”
So, Reed says, getting pre-approval can be a valuable card to have in your hand in the car buying game. It can help you negotiate a better price. “The pre-approval will act as a bargaining chip,” he said. “If you get pre-approved at 4.5%, the dealer says, ‘Hey, you know, I can get you 3.5. Are you interested?’ And you should accept it, but make sure that all the terms, i.e. prepayment and term of the loan, remain the same.”
A word of warning about lenders: Van Alst says there are a lot of shady loan outfits operating online. Reed says you should go with a mainstream bank, credit union, or other lender with a name you recognize.
2. Keep it simple at the dealer.
If you’re buying a car at a dealership, focus on one thing at a time. And don’t tell the salesperson too much. Remember – this is a game type. And if you’re playing cards, you’re not going to hold them up and say, “Hey, guys, look – I’ve got a queen pair,” right?
So at the dealership, both Reed and Van Alst say, the first step is to start with the price of the car you intend to buy. Dealer salespeople often want to know if you’re going to sell another car and if you’re looking to get a loan through the dealership. Reed says don’t answer those questions! That makes the game too complicated and you’re playing against pros. If you negotiate a really good car purchase price, they can either raise the interest rate to make you more money that way or lower you on the sale. They can organize all of those elements in their heads at once. You do not want. Keep it simple. One thing at a time.
Once you’ve decided on a price, you can talk about trade-offs, if any. But Reed and Van Alst say do your homework there. A little research online can tell you how much your trade is worth in ballpark conditions. Reed recommends checking out the free pricing guides at Edmunds.com, Kelley Blue Book, and NADA. On Autotrader you can also see what people in your area are asking for your car model. And he said, “You can get an actual offer from Carvana.com and also by taking the car to CarMax, where they will write you a check on the spot.”
So he and Van Alst say don’t be afraid to walk away or buy the car at a good price without trade-offs if you feel the dealer is underestimating your old car. You have a lot of other good options these days.
3. Do not purchase any add-ons at the dealer.
If you’ve bought a car, you know how this works. You’ve been at the dealership for hours, you’re tired, you’ve decided the price, you’ve bargained for the sale – then you have to hand it over to the financial manager.
“You’re taken to the back office,” says Van Alst. They often treat it like a box. This is where the dealer will try to sell you extended warranties, tire protection plans, paint protection plans, something called void coverage. Dealers make a lot of money from these. And Van Alst says it’s often overpriced and most people don’t know how to find a fair price.
“You know, this add-on is being marked up 300%, right? You don’t really know any of that,” Van Alst said. So he and Reed say that a good strategy, especially with a new car, is to just say no – to everything. Especially with long-term loans, he says, there’s more room for agents to try to sell you extras. The finance officer may try to tell you, “Just a little more money each month.” But that amount adds up.
“Regarding the extended factory warranty, you can always buy it later,” says Reed. “So if you’re buying a new car, you can buy it three years from now, right before it’s out of warranty.” At that point, if you want an extended warranty, he says, you should call several dealers and ask for the best rates each can offer. That way, he says, you won’t have to pay the cost of your car loan and pay interest on a service you won’t even use for three years because you’re still under warranty on the new car. .
Gap insurance promises to cover any gap between the purchase price of replacing your near-new car with a brand new one if your regular insurance doesn’t cover the replacement. Full replacement if your car is totally damaged. Van Alst says that arbitrage is often overvalued and fundamentally problematic. If you still want to buy the product, it’s best to buy it through your regular insurance company, not an agent.
4. Beware of car loans longer than six or seven years.
One-third of new car loans now have terms longer than six years. And that’s “a really dangerous trend,” says Reed. We have a whole story about why that is. But in short, a 7 year loan will mean a lower monthly payment than a 5 year loan. But it also means paying more with interest.
Reed says seven-year loans typically have higher interest rates than five-year loans. And like most loans, interest is paid upfront – you’re paying more in interest than on principal in the first few years. “Most people don’t even realize this and they don’t know why it’s dangerous,” says Reed.
Reed says that if you want to sell your car — you decide you can’t afford it, or maybe you have another child and need a replacement pickup truck — with a seven-year loan, you have More likely to be stuck still owed more than the car is worth. So he said, “It puts you in a very vulnerable financial situation.”
A better way to go, says Reed, is a 5-year loan to buy a new car, and “with a used car, you should really finance it in just three years, i.e. 36 months.” One good reason, he says, is that if your old car breaks down and isn’t worth fixing – assuming the transmission is completely broken – you’re more than likely to have paid off the loan by that point.
Reed says that a five-year loan makes sense for new cars because “it’s the traditional way – that’s an attractive point. The payments aren’t so high. You know the car will still be in good condition. . There will still be value of the car at the end of five years.”
Also, Van Alst and Reed say make sure agents don’t ignore additions or change loan terms without your recognition. Read carefully what you are signing.
Reed said a colleague at NerdWallet actually bought a pickup truck recently, and “when she got home, she looked at the contract.” She asked for a five-year loan but the agent said it gave her a seven-year loan instead. “And they included a factory warranty that she didn’t claim and she didn’t want.” Reed says she can cancel the entire contract, remove the extended warranty, and get a discount on it.
“But the crux of the matter is,” he said, “I mean, this is someone who is very financially savvy, but they were able to do this to her. And it’s not a strange scenario. when people think they got a good deal, but then when they go home and review the contract, they find out what was done to them.”
5. Don’t buy too many cars. And consider a used car that will save a lot of money!
“The golden rule is that all of your car purchases really shouldn’t be more than 20 percent of what you pay,” says Reed. And he says that’s the total cost of the car, including insurance, gas and repairs. “So the car payment itself should be between 10 and 15%.”
And if a new car with a 5-year loan doesn’t fit your budget, you may decide you don’t really need a brand new car.
“We’re really living in a golden age of second-hand cars,” says Reed. “I mean, the reliability of used cars today is remarkable.” Reed says there are loads of cars coming up for a three-year lease that are in very good condition. And even older cars, he says, are definitely worth considering. “You know, people are buying used cars that are good for hundreds of thousands of miles and driving them for hundreds of thousands of miles,” Reed said. “So I’m a big fan of buying a used car as a way to save money.”
He acknowledges that it’s important which car you buy and that you should read reviews and ratings on which brands and models are more or less likely to experience costly repair problems. He said some European cars are notoriously expensive to maintain.
NPR has a personal finance group on Facebook called Your Money and Your Life. And we asked team members about buying a car. Many said they were shocked by how much money others in the group said they spent on cars. Patricia and Dean Raeker from Minneapolis wrote, “40 years of vehicle ownership and our total vehicle purchase doesn’t even add up to the cost of one of the sponsored things these guys are talking about. .”
Dean is a freelance AV technician, and Patricia is a flight attendant. Our newest, best-looking purchase was a 2004 Honda Accord for $2,400, bought last year, with regular maintenance that could last another 100,000 miles, they say. And they say they “can’t understand people who insist on pushing their retirement away.”
Even if you buy a used car that’s a bit newer than the Raekers’, the pair make a great point. What else could you spend that car payment on? And if you can cut half of what you can spend, that’s extra money for your retirement account, your kids’ college fund, or whatever else you want to do with the money. there.