Whether you’re a first-time car buyer or looking for an upgrade, the idea of getting a new car is exciting! While you’re probably thinking about what music you’ll play or what road trips you’ll take, there are many other choices to make when buying a car. Use our road map below to help you drive into a new car confidently.
1. Know your budget.
Your budget is the most important tool you’ll need when looking for a new car. Try to spend less than 10% to 12% of your total take-home pay. That means whatever money you have left after taxes, health insurance premiums, or 401(k) deductions that are taken out of your total gross income from your employer.
It’s also a good idea to see how much you can afford to pay while taking into account your other monthly expenses like rent or groceries. Use the free Goals and Budgets tool to create or update your budget for all expenses, including what you can afford to pay for your monthly car payment and what you expect to pay regularly for gas and maintenance.
2. Consider short-term financing.
While a lower monthly payment that comes with a longer term may sound appealing, you’ll typically pay a higher interest rate and more in total interest over the life of the loan.
Let’s take a look at an example of how these terms compare and how much you could save in interest with a shorter-term loan.
36-Month Loan | 48-Month Loan | 60-Month Loan | |
Total Loan Amount | 30,000 | 30,000 | 30,000 |
Interest Rate (APR*) | 5.20% | 5.90% | 6.45% |
Monthly Payment | $902 | $704 | $587 |
Total Interest Accrued | $2,466 | $3,753 | $5,177 |
*FAIRWINDS rate and savings shown are for illustrative purposes. Your actual rate and savings will vary.
In the example above, you can see that your monthly payment would be lowest with the 60-month loan option. However, you’ll be paying $2,712 more in interest over the life of the loan compared to the 36-month loan option, and $1,425 more in interest compared to the 48-month loan.
These numbers also do not account for any down payment on the cost of a $30,000 car. By making a down payment of at least 20% when buying your car, you can significantly reduce your monthly payment. Use the free Auto Loan Payment Calculator to see how much your monthly auto loan payment would be based on the purchase price of the vehicle you want, including interest, and how much you could save with a shorter term.
3. Get Pre-Approved
In order to get the best deal on financing for your car, it’s smart to get pre-approved before heading to the dealer. With financing secured in advance, you can confidently negotiate for the best price and terms, saving both time and money. This can also help you stick to a clear budget when heading to the dealer since you know the amount you are approved for and what you can spend in advance.
4. Do your research before you go to the dealer.
Look up the Kelley Blue Book or JD Power value of the vehicle to make sure the price of the car you want is in line with the market. If you're financing the car, understand the terms, interest rates, and monthly payments involved before signing.
5. Inspect the car thoroughly.
Take your time looking at cars, and try not to rush through the process. It's always a good idea to check the vehicle's history. This will provide you with details regarding accident history, repair information, potential recalls, and other important details about the vehicle. Also, be sure to complete a test drive before purchasing the car. The car may appear great on the outside, but a test drive could help you evaluate how it drives, comfort, and visibility.
6. (Almost) Everything is negotiable.
Sure, there are some things set in stone (registration, fees, taxes, and destination charges), - but there’s a lot more on the table than just the sticker price. The longer the car has been in their inventory, the more the dealer is motivated to work with you on things like the price, trade allowance, and add-ons. When you go to the dealership informed, you’ll find that you have more power at the bargaining table.
7. Review all of the details.
Carefully read and comprehend all paperwork before signing. Pay attention to warranties, return policies, and any potential extra costs. If anything seems unclear, don't hesitate to ask questions.
With the help of these tips, you can navigate your car-buying experience with ease and confidence, knowing that you’ll make the best decision for you. Be sure to take your time so you can make a well-informed decision and align that with your financial goals along the journey to financial freedom.