The beginning of the year presents an excellent opportunity to start searching for a vehicle, as dealerships are typically eager to clear out older model stock. However, the process of purchasing a car isn’t just a matter of walking into a dealership. There are several important decisions to consider beforehand, including make and model, whether to buy new or used, desired features, financing options, and much more.
To make such a significant purchase effectively, having a well-thought-out plan is essential. The following four steps will help you maintain your focus and safeguard your financial well-being as you prepare to acquire your next vehicle.
Step 1: Establish a budget
Before you dive into looking at cars, it’s crucial to set a budget. A practical approach is to list out your wants versus needs in a vehicle. For instance, if you have a long commute, fuel efficiency might be a requirement, whereas features like the latest technology, such as Bluetooth, could be considered optional. By identifying your “must-haves,” you gain clarity and control over your spending limits, knowing which features you can forgo to keep costs down.
As you browse different models, focus on vehicles that align with your financial comfort zone. Remember to account for any unexpected changes in your financial situation, such as loss of income. According to Experian, the average new vehicle loan was $32,480, with a typical monthly payment of $550 in the third quarter of 2019. This information can help you gauge how much you should feel comfortable borrowing and what kind of monthly payment fits into your budget. (See also: 7 Simple Strategies for Creating Your New Car Budget)
Step 2: Check your credit status
About three to six months prior to actively shopping for a vehicle, ensure your credit is in optimal condition. Consistently pay your bills on time, and take advantage of your right to request a free credit report via Experian or by visiting annualcreditreport.com to check for any inaccuracies or signs of fraud.
Additionally, consider utilizing resources like Experian Boost to enhance your credit profile before visiting dealerships. This tool has the potential to improve your credit score almost immediately and provides lenders with a more comprehensive view of your financial habits, focusing on your history of on-time payments for utilities and telecom bills. (See also: 6 Financial Steps to Take When You Decide to Buy a Car)
Step 3: Explore various loan options
Financing is a common practice, with over 85 percent of new cars and 55 percent of used cars being financed. However, financing options aren’t limited to dealership lending. It’s smart to compare loans from various lenders to find the most favorable terms and interest rates. You can explore multiple banks for inquiries, as well as consider credit unions and traditional finance companies to uncover the best deal for your circumstances.
Your credit score will significantly influence the rates you can access; for example, the average interest rate for new vehicle financing stands at 4.21 percent for those with “prime” credit, while “subprime” individuals face rates as high as 14.06 percent.
You don’t have to worry about your credit score being negatively affected while shopping for an auto loan. Inquiries made for car loans are typically treated as a single inquiry if made within a 30-day window, or may be excluded from the credit calculation entirely.
Step 4: Obtain a vehicle history report for used cars
Buying a used car can lead to substantial savings. The most recent data shows that the average used vehicle loan was $20,446, roughly $12,000 less than financing for a new vehicle. This difference can translate into significant interest savings over the life of the loan.
Nonetheless, when purchasing a pre-owned vehicle, it is crucial to be well-informed. Always request a vehicle history report, like one from AutoCheck, before finalizing your purchase. Such reports can tell you how many previous owners the vehicle has had and whether it has been in any accidents. This information will help you avoid unexpected issues and assess the true value of the vehicle. (See also: 8 Key Questions to Consider When Buying a Used Car)
Enjoyed this article? Share it!
About the Author
