Arvest Education Center

Buying a Car

When buying a car, planning and research are everything. A vehicle represents a substantial purchase for most people. Figure out what you really need from your new car. Will you be driving kids to school and sports practice? Is this a commuter car that needs to get good gas mileage? Also, get your finances in order. Pull your credit report and know your credit score. This can save hassles when it’s time to finance. Finally, research the car-buying process so you know what to expect and can negotiate the best deal on your new ride.

WHAT CAN YOU AFFORD?

Before you begin shopping for a car, take a look at your budget and figure out how much you can afford to spend. You don’t want to be “car poor” or cut into your savings to afford your new ride. What’s a realistic amount for your monthly car budget? This number should include car payments, insurance, operating expenses and maintenance.

You should consider making a down payment on your car if possible. Keep in mind, a bigger down payment results in a lower monthly payment.

VEHICLE FINANCING

Once you’ve decided how much you want to spend, it’s time to find a lender who will loan you the money. Your credit report will play a part in determining how much you are approved to borrow.

Lenders decide how large a loan you qualify for by looking at your credit report. Considerations include your credit worthiness (How well have you paid past debts?), financial means (Do you have sufficient income to repay the loan?) and debt load (Do you have too much debt to be able to take on more?)

PRE-APPROVED FINANCING

One recommended practice for buying a car is to get pre-approved with a lender before looking at any vehicles. The lender will typically pre-approve a certain amount based on your income and credit history. You’ll then know exactly what you can afford and will be able to leverage the deal in your pocket with any deals the dealership offers.

FINANCING OPTIONS

Dealer financing – The advantage of dealer financing is convenience. You buy and finance the vehicle at the dealership. Keep in mind: If the dealer is just reselling a bank loan, they will be looking to make a profit and you likely won’t get the best rate.

It is relatively common for dealers to offer special rates and incentives to get rid of overstock, especially at the end of the model year. Make sure you discuss any dealer financing options and compare their offer(s) to your prearranged financing.

Banks – Banks traditionally offer lower auto loan interest rates than dealerships, especially to their existing customers. You’ll likely be required to make a down payment on this type of loan.

Home Equity Loans – Another option is to borrow the money from your home’s equity. Your home is used for collateral on the loan, meaning your house can be taken if you can’t pay the loan. If you’re sure you can afford your payments, a home-equity loan is an option. Even better, the interest paid is tax deductible.*

Trade-In – Your old car can be used as a down payment on a new car.

NEGATIVE EQUITY

The value of a new car drops as soon as you drive it off the dealership lot. It immediately becomes a used car. This depreciation is an important concept to understand when dealing with financing. While the value of your car drops immediately, the loan principal drops more gradually. If you try to sell the car too soon, you may owe more than it’s worth. That’s called negative equity.

Avoid getting into negative equity situations by sticking to these simple rules:

  1. Keep your car until it is completely paid off.
  2. Don’t buy a car you can’t afford.
  3. Don’t drag out your payments. If you can’t afford the car, you can’t afford the car.

This content has been provided by Visa Money Skills and is intended to serve as a general guideline.

*Consult a tax professional for more information.