New Car Buying Guide
If you’re in the market for a new car, you’re probably spending a lot of time thinking about what you need from this vehicle. Fortunately, you’ll know how to buy a car by the time you finish this new car buying guide.
Perhaps it’s overall space or a high MPG. Maybe you’re looking at safety ratings or you need some extra muscle to get through winters.
Whatever the case, you’ll have to actually pay for this new car at some point. For most people, this requires financing.
Although there is no arguing that your vehicle’s features will be important, don’t forget the enormous role auto financing will play, too. If you don’t understand this concept, your dream car can quickly turn into a nightmare.
This new car buying guide aims to help you avoid this situation. And guide you to the best auto financing arrangement possible with the following new car buying tips.
Understanding the Unique Features of Auto Loans
When we talk about how to finance a car in this new car buying guide, what we’re really talking about are the steps involved with getting an auto loan. Again, some people may buy theirs outright with cash, but the vast majority of people use auto financing for their purchases.
They will get a loan from a lender – often a bank – and use it to buy their new car. Then they will pay this loan back to the lender over time. As with other types of loans, this will almost always involve some amount of interest.
Even if you have the cash to buy a new car, it’s generally a good idea to take out a loan. It can help improve your credit score, for one (assuming you don’t miss payments), and won’t have nearly as big an impact on your savings.
That said, keep in mind that when you finance a new car, you automatically add to its total price. You’ll need to pay interest on that auto loan, after all. Therefore, paying for the entire vehicle would be cheaper but is still unrealistic and not necessarily a good idea.
Understanding APR and Interest
The interest rate you will pay is just a percentage of the overall auto loan the lender charges. Percentage Rate (APR) is the amount you pay to cover fees related to borrowing the money. As the name makes clear, this is also expressed as a percentage. The APR you’re offered will generally depend on three main factors:
- Your credit score and history
- Whether you’re new car buying or looking at a used vehicle (new ones get better rates)
- How long it will take you to pay back the auto loan
Keep in mind that the Truth in Lending Act requires lenders to make both the APR and interest on a loan perfectly clear before they can expect that a borrower will pay them back. That said, this does not mean that a lender has to offer you the best interest or APR they can. This is why it’s important that you consider all of the car buying tips presented here in this car buying guide before signing on the bottom line for your car.
What Is the APR on a Car Loan?
There is no one APR rate for every type of loan. Two people could request the same amount from the same lender for the same car and end up with different APR’s based on their unique histories (as we just covered).
If possible, you can earn a more favorable APR by committing to a larger down payment and a shorter term.
For help figuring out what you will pay on this type of auto financing, use an auto loan calculator. It will make life a lot easier as you consider multiple new car options.
Car Loans and Terms
The term of your car loan simply refers to how long you will take to pay the lender back. For example, if you sign up for a five-year term, you will have 60 months to pay back the loan. Once you do, the car is yours. Before that, the lender technically owns the vehicle.
Five years used to be the norm for car loans, but that is beginning to change. As average new car pricing increases, most financial institutions have begun offering eight-year auto financing options, as well. While longer terms will result in lower monthly payments, they will almost always result in larger totals overall.
In any case, the vast majority of auto loans are paid off in monthly installments. Most financial institutions can set up auto-withdraw, so you won’t have to worry about missing your car loan payment.
Get Your Credit Score in Order Before You Begin Shopping
If you were to get anything from this new car buying guide, it should be to know your credit score. Any time you need to finance a purchase, lenders will need to run your credit score. The potential lender wants to make sure you have a history of paying back your loans. They also want to know how much interest they should charge you based on the perceived risk of providing you with the money to purchase your new car.
That’s why you should begin improving your credit score long before you consider entering the new car buying process or even step on a car lot. This process can take a long time, depending on your current credit score, so get started right away and do the best you can before looking to take out an auto loan.
Once you know you have a good credit score, it’s time to dip your toe in the water and apply for car financing. Then this new car buying guide will lead you the rest of the way.
Understanding Your Credit Score
One of the key elements of this new car buying guide is being completely familiar with your credit score. You may hear a credit score referred to as a FICO score, but that’s not completely accurate. When you start the new car buying process, lenders use a number of different methods to measure your credit score. Your FICO score is one of them but not the only one.
Credit bureaus decide your credit score based on:
- How long you’ve been using credit
- The number of accounts you have open
- How much credit you have already
- The amount of debt you have
- Your record of paying your bills on time
The lower your credit score, the more interest is charged to offset the perceived risk of lending you money. A low score may also require a larger down payment. In addition, reduce the length of the term a lender is willing to offer.
Generally speaking, 720 and above is ideal for credit scores and will give you the best car financing rates.
Checking Your Credit Score
When you start the new car buying process, don’t wait until you’re in a lender’s office before finding out what your credit score is.
There are a few ways you can easily get your credit score. Some credit card companies have actually begun providing them on their customers’ bills.
Otherwise, you can request your entire credit report for free from the three major reporting agencies (TransUnion, Experian, and Equifax) once a year by going to AnnualCreditReport.com.
You want to look at your credit report – not just your scores – before you begin trying to finance a car. As a result, there could be errors that are hurting your chances of solid offers. Go through your credit report to check for any changes before you apply for a single loan beforehand if necessary.
Then take a deep breath and go back through this section of this new car buying guide. In addition, look to other sources that can help you improve your credit standing and put you right back into the auto financing game.
What Happens if My Loan Application Is Rejected?
No one wants to hear about a car loan application rejection. Still, you need to think about what this truly means. A simple fact is clear when it comes to car buying, lenders want to lend money. It’s how they stay in business. So if they reject your application during the new car buying process, it’s because they really didn’t think you’d be able to pay it back. These institutions have built up reliable processes for making these kinds of judgments. If they refuse financing to you, it’s probably for the best.
Worse than not receiving auto financing would be getting that loan and being unable to pay it back. That would make it much harder to receive auto financing for another vehicle in the future.
Avoid “We Finance Everyone”
This car buying guide is focused on what makes sense. Mainly, you should have all your financial ducks in a row when it comes to new car buying. However, following a rejected car loan application, it’s extremely easy to look for any available option. This is when you might find a lender who claims, “We finance everyone.”
You’ve heard the saying about something that’s too good to be true, right?
This is an example of one of those times.
A lender with this kind of sales pitch may indeed finance your vehicle purchase. However, the terms are going to be just about as unfavorable as they come.
So don’t ignore this simple car buying guide advice when honestly, you’d be better off carpooling and/or using public transit before accepting one of these auto loans.
Step back, revisit this new car buying guide and get your finances in order, and reapply.
Is Used Car Financing Different?
You may be asking yourself is used car financing different and how does it fit into this new car buying guide? The obvious difference when it comes to used car financing is that you won’t need as big a loan. While this may make used cars seem like a much more attractive prospect, that may not necessarily be the case.
Among other things, used cars are harder to value, so lenders see used car financing as bigger risks than doing the same for new cars. As such, they tend to charge higher interest rates for used car loans – at least 2% higher APR. Used car loans will usually have much shorter repayment terms, as well.
Challenges like these are why it’s generally easier to get used car financing if you purchase from a dealership. Lenders will assume the vehicle is in better condition if a valid dealer is selling it.
If you purchase a used car from a private party, you’ll most likely spend a lot less, but you may still need a lender to help. LightStream is one of the only online lenders that offer used car financing.
Refinancing a Vehicle
Although it may never be necessary, it’s worth spending a couple of minutes talking about how refinancing your vehicle would work in this new car buying guide.
In short, a car refinance means taking out a new auto loan to pay off an old one. The car is still used as collateral. However, the two auto loans may differ in other ways.
Some common examples include:
- Reduced Monthly Payments
- Lower Interest Rates
- Longer Loan Terms
- Shorter Loan Terms
You’d only want to refinance if it meant obtaining a car loan that was superior to your initial version.
If you’re curious about what it might cost for you to go through this process, you can use a car refinance calculator to get a sense of what your new loan payments would look like.
New Car Buying Guide – The Ins and Outs of Car Leasing
This new car buying guide shifts to car leasing versus new car buying, because you have to consider all angles. Of course, many people are driving vehicles they don’t actually own. Instead, they go through the car leasing process.
Generally, this means they come to an agreement with a car dealership for a set number of years for which they will drive the vehicle. The dealership assesses the amount of depreciation the vehicle will go through over the course of the auto lease. Then charges the driver based on that amount.
Let’s look at the benefits and potential drawbacks of this arrangement.
The Pros of Car Leasing
The obvious benefit of an auto lease is that you don’t end up paying as much when new car buying. Many people only drive a new vehicle because they get a discounted price by leasing it. Otherwise, it would be way out of their price range.
You can lease used cars, but it’s usually done with new ones. It gives drivers the benefit of a brand new car that is still under warranty without the drawback of paying the same sizable amount every month.
Imagine leasing a new car every few years. Most people will keep their vehicles for at least twice as long when they buy them new. If you like variety in your life, you’ll love taking out a brand new car lease every three years.
No Hassles and No Down Payment
Furthermore, there are no hassles at the end of an auto lease. You just drive it back to your dealership. If everything checks out, you either switch it out for another vehicle or just walk away. Compared to the process involved with selling a used car or even trying to trade it in, that’s nothing.
Finally, most car leases don’t require much of a down payment, if any. If you plan ahead, leasing a vehicle is very easy to afford and won’t require you to go through the process of securing an auto loan like you do with new car buying. In the majority of states, you also won’t pay sales tax on the total price of the vehicle – just on the monthly payments.
The Cons of Car Leasing
If an auto lease is so great, how come everyone doesn’t do it?
The main drawback to car leasing is that you won’t actually own the vehicle at any point like you would with new car buying. You won’t be able to modify it to meet any unique preferences and it won’t be an asset you can sell off if you ever need cash fast.
Your lack of ownership also means you will face penalties for any damage done to it. The lease will also specify how many miles you can put on it. This is something you’ll need to monitor closely or end up paying a penalty on when the agreement is over.
Fees Add More Costs
There are also a number of fees associated with an auto lease. The leasing company will charge you a rate. Then there’s the acquisition fee you pay at the beginning. Or a disposition fee you’ll be responsible for at the end. Some car leasing comes with both.
With an auto lease, you’ll be paying thousands of extra dollars you wouldn’t be if you went the new car buying route. Again, these are fees you’ll never recoup by selling the vehicle.
Lastly, while it might sound great to pick out a brand new car every few years, this also means constantly making car payments. For owners of cars who went through the new car buying process, making that last payment is usually a cause for celebration because they suddenly aren’t spending large sums every month. If you lease a vehicle, you won’t be hosting this kind of party any time soon.
New Car Buying Guide – Vehicle Service Contracts vs. Warranties
This new car buyers guide now navigates to the choppy waters of service contracts and new car warranties. If you buy your car from a dealership, the last step of the process will be talking about vehicle service contracts.
These are often confused with warranties, but it’s crucial to understand the difference. A warranty comes with the price of the new car and is provided by the new car manufacturer. It’s a policy that basically guarantees certain features of the automobile for a specific amount of time. For example, if something was to go wrong with your starter and it’s under warranty, you could get it fixed without paying for the repairs.
Vehicle service contracts provide a similar type of coverage from the dealership but at an additional cost. Dealerships will usually give new car buying customers a number of contracts to choose from.
This car buying guide asks the question. Should you take them up on their offer?
Considering Vehicle Service Contracts
Whether or not you should pay for a vehicle service contract will ultimately be a personal decision.
However, there is some tried-and-true advice you should know about from this car buying guide.
The first tip is to compare the contract to the warranty. There could be overlap where you would be spending money twice for the same coverage.
Second, these contracts are often only enforceable if you follow the dealer’s maintenance requirements. In other words, you might bring your vehicle in because of that starter problem only to find out you’ll have to pay for it because you didn’t bring the car in for regular maintenance every six months, per your contract.
Third, find out what the repair process involves. There are horror stories about people who found out the hard way. Their service contracts actually outsourced the repairs to another company, which involved a major headache.
The Car Extended Warranty
Then there is also a new car buyers extended warranty to think about. This warranty will kick in after the initial bumper-to-bumper warranty on your vehicle expires. It will usually cover most breakdowns and, therefore, should help stabilize the total cost of repairs over time.
If you decide against the extended warranty when you purchase, it may still be an option in the future. You can purchase it any time during the term of the warranty. In fact, you can even purchase it afterward, though the price will go up.
You may also have the option to purchase a used car extended warranty if you buy from a dealer. These warranties often seem attractive because they offset the fear that a used car will be more likely to suffer problems in the near future.
Should you pay for one?
Like many of the recommendations in this car buying guide, most involve doing your research beforehand. If you find that the vehicle you wish to purchase tends to regularly need repairs, the used car extended warranty may be worth it.
Obtaining Auto Insurance
Last on our list of steps for financing using our new car buying guide is vehicle is auto insurance. As you probably know, you can’t legally drive a car unless insured.
Nonetheless, it’s important to remember your insurance payments, as the payments involved will definitely affect your budget. Check with your insurance carrier before proceeding with a purchase, too, as the type of vehicle you buy will also play a role in how much you pay for coverage.
Also, you should know about two particular forms of insurance:
- GAP Insurance: Guaranteed Auto Protection insurance is coverage that will pay out the difference between the value of your car if it’s stolen or wrecked and how much you still owe on it. Without this type of policy, your insurance agency will usually only pay out the value of the vehicle during one of these scenarios. GAP insurance is almost always a good idea when leasing a vehicle.
- Credit Insurance: This is a policy that will cover your payments in the event that you become disabled, involuntarily unemployed, pass away, or collateral you used to secure the loan is destroyed.
If you’re worried about your family troubled with your car payments should you pass away before it’s paid off, just remember that life insurance can help with this, too.
You’re Now Ready to Buy a Car
Now that you’ve finished the above new car buying guide, you should feel very confident about purchasing a new car. Nonetheless, the most important thing to do is take your time. The type of vehicle you end up with will definitely play a big role in your future. However, the same is true about how you’ll manage to pay for it. Get started with the new car buying process early and refer back to this new car buying guide as necessary so you avoid costly mistakes.
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