New Cars: How to Avoid Debt and Get a Great Deal
Buying a new car can be an exciting but daunting experience. With so many options and deals available, it’s easy to make mistakes that could leave you in debt or paying more than you need to. But fear not! NPR’s Life Kit is here to guide you through the car-buying process, helping you make smart decisions that will save you money and keep you financially secure. In this article, we’ll cover five key tips to help you navigate the car-buying game and come out on top.
1. Get preapproved for a loan before visiting a dealership.
One of the best pieces of advice when buying a car is to get preapproved for a loan from a trusted lender, such as your bank or a credit union, before setting foot in a dealership. This step is crucial because it forces you to consider how much car you can actually afford. By knowing your budget beforehand, you can avoid falling in love with a more expensive model and overspending. Additionally, getting preapproved reveals any credit problems and allows you to shop around for the best interest rate. Be wary of dealerships that may try to offer you a higher rate than you actually qualify for.
2. Keep it simple at the dealership.
When you finally visit a dealership, it’s important to stay focused on one thing at a time. Don’t reveal too much information to the salespeople, as they are experts at manipulating the game in their favor. Start by negotiating the price of the car you want to buy and don’t entertain questions about trade-ins or dealership loans until after settling on the purchase price. Doing your research beforehand will help you determine the fair value of your trade-in, and you can always walk away from a lowball offer.
3. Don’t buy any add-ons at the dealership.
After spending hours at the dealership, you’ll eventually be led to the finance manager’s office, where they’ll try to sell you extended warranties, tire protection plans, and other add-ons. Remember, the dealership makes a significant profit margin on these extras, often marking them up substantially. The best strategy is to say no to all add-ons, especially with a new car. You can always purchase an extended warranty in the future, ideally just before your initial warranty expires. Additionally, gap insurance, which covers the gap between the purchase price and insurance payout in case of a total loss, is usually overpriced at dealerships. It’s better to obtain it through your regular insurance provider.
4. Beware of longer-term car loans.
A dangerous trend in car buying is the increasing popularity of longer-term loans, with a third of new car loans now exceeding six years. While these loans come with lower monthly payments, they result in paying significantly more interest over time. It’s important to understand that longer-term loans often come with higher interest rates and put you in a vulnerable financial situation. A better approach is to opt for a five-year loan for a new car and finance used cars for no more than three years. This way, you avoid being stuck with negative equity and are more likely to pay off the loan before potential costly repairs arise.
5. Don’t buy more car than you can afford.
A common rule of thumb is that your total car expenses, including insurance, gas, repairs, and the car payment itself, should be no more than 20% of your take-home pay. And when it comes to the car payment itself, it should ideally fall between 10% and 15%. If a new car with a five-year loan doesn’t fit into your budget, consider the numerous options available in the used car market. Used cars are often highly reliable these days, thanks to the steady stream of well-maintained vehicles coming off three-year leases. By purchasing a used car, you can save significant amounts of money and still enjoy a reliable vehicle.
In conclusion, buying a new car doesn’t have to be a financially draining experience. By following these five tips, you can avoid debt, get a great deal, and make a wise investment. Remember to get preapproved for a loan, keep negotiations simple at the dealership, avoid add-ons, be cautious of longer-term loans, and only buy a car that fits comfortably within your budget. With a little research and careful consideration, you can drive away in the car of your dreams without breaking the bank.