By Rod Griffin on 10 January 2020
The new year can be an opportune time to start looking for a
new, or new-to-you car, as dealerships look to clear out previous model years.
But shopping for a car isn't always as simple as showing up on the lot. There
are a lot of decisions to be made between now and walking into the dealership:
make and model, new or used, preferred features, type of financing to use, and
the list goes on.
Before making that type of significant purchase, it's best to
have a plan. Here are four steps to keep you focused and protect your financial
health as you prepare to make your next vehicle purchase.
Step 1: Set a budget
Before you even begin to browse cars, it's vital to set a
budget. One of the best ways to do this is to create a list that differentiates
between your wants and needs in a car. If
you're a commuter, you likely need fuel-efficiency, and while you may want the
latest technology, like Bluetooth, it's not a necessity. Outlining your
"must haves" can give you more control as you begin looking at costs,
as you already know which items you're willing to forgo if it saves
money.
As you look at different models, stick to cars your budget can
handle, even if there was a sudden change in your financial situation, such as
a job loss. The average new vehicle loan amount was $32,480 in the third
quarter of 2019, according to Experian, while the average new car payment was
$550. These amounts can give you a baseline as you look at your own budget to
identify the total amount you feel comfortable borrowing, as well as how much
of a monthly payment you can handle. (See also: 7 Easy Ways to Calculate Your New Car
Budget)
Step 2: Ensure your credit is in good shape
About three to six months before you start seriously shopping
for cars, make sure your credit is in good shape. Continue to pay your bills on
time, and request a free credit report through Experian or by visiting
annualcreditreport.com to check for fraudulent activity and to ensure all
information is accurate.
Additionally, use the tools available to improve your credit,
like Experian Boost before you hit the car lots. Experian
Boost can increase your credit score instantly, and it gives lenders a more
complete picture of your financial history, and your ability to pay off debt by
looking at your on-time utility and telecom payments. (See also: 6 Money Moves to Make the Moment You
Decide to Buy a Car)
Step 3: Shop around for the best loan options
More than 85 percent of new vehicles and 55 percent of used
vehicles are financed. But financing isn't limited to a single type of lender.
In addition to loan options offered at a dealership, it's a good idea to shop
around for loans to see who has the best terms and rates available. Just
because you put in an inquiry at one bank doesn't mean you can't look at
another, but also consider looking at credit unions and traditional finance
companies to find the best deal for your situation.
This is one area where your credit score can
make a significant difference in what rates you're offered — the average
interest rate for new vehicles for consumers who are in the "prime"
credit tier is 4.21 percent, whereas for consumers in the "subprime"
credit tier, it is 14.06 percent.
You can shop for a car loan without worrying about your credit
score. Inquiries for auto loans are either counted as only one inquiry when
they occur within a 30-day period, or may be excluded entirely from the
calculation.
Step 4: If shopping for a used vehicle, get a vehicle history
report
It's not surprising that buying a used car can be a significant
cost savings. In fact, at $20,446, the average used vehicle loan last quarter
was about $12,000 less than financing a new vehicle. When financing, that can
mean significant savings in the amount of interest you'll pay over the term of
your loan.
However, it's important to go into a used car purchase fully
informed, so be sure to request a vehicle history report, like an AutoCheck
report, before committing to the purchase. These reports include how many
previous owners the vehicle had, or if there were any reported accidents. This
can help you avoid surprises and give you a better idea of the value of the
car. (See also: 8 Questions to Ask When Buying a Used
Car)
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