Looking to buy a new car? (I wish I could!) It’s a completely exciting experience. Especially if you find a car that you just have to have! Your heart rate goes up, you feel giddy, and you can’t help but smile. It’s basically love! However, this giddy happy feeling can make you miss or over look some important details.
It’s just like that boyfriend you had that your friends and family warned you about. They could see all the red flags that you couldn’t because you were blinded by love.
Don’t let this excitement blind you! Here’s how you avoid car buying mistakes that will hurt you in the future.
Check the resale value
Before buying any car you should check the resale value of the model you want. If possible, look at the year you would like to purchase. If it’s a brand new car you may need to look at the resale value of a car that is one or two years older.
This will give you a good picture of how well the car you would like to purchase holds it’s value. Every car will lose some value once you drive it off the lot, however, buying a new car that holds it’s value will prevent you from being too upside down in your loan.
This is something that I had to learn from experience. I bought a car that lost a ton of value very quickly. I’m not talking about a base line model car either. This car had a ton of cool features. It was a really nice car. (or so I thought)
A few years down the road, I learned that this car wasn’t worth much at all even with all the features it included. Which left me extremely frustrated and way too upside down in my loan. I was stuck feeling like I was paying for nothing because I new one day when it is time to get another car I wouldn’t get back hardly any of the money I paid for it.
No loans over 5 years!
Again, I learned this from experience, I’ll explain that later! If you get a loan that is longer than 5 years just so you can afford a car, you CAN’T afford the car.
Taking a loan out that is greater than five years is bad for multiple reasons. The first one is that it causes the interest rate on the loan to increase, in some cases, by a great deal. This leads to you paying even more for the car and possibly paying well over what the car is actually worth.
Say a car is $30,000 and you don’t put any money down or have any trade in value. If you have great credit you might get a 2.9% interest rate for a 5 year loan. Your monthly payment would be approximately 534 dollars a month. The total interest you would pay over the course of the loan would be $2,033. This means total pay for the car is $32,033.
Let’s say that payment was too high so you went with a 7 year loan. Your interest rate will go up to around 5% because the extended time of the loan. (you will be hard pressed to find a bank who will keep the same interest rate for a longer loan) This will lower your monthly payment to $424 dollars. That’s a lot more affordable. But here’s what they don’t tell you at the dealership; the total amount of interest you will pay over the course of the loan more than doubles. You will now pay $5,617 in interest alone.
What this means is that you will be paying $35,617 for a car that is only worth $30,000 brand new. With depreciation your car may only be worth 25,000 dollars in a few years. You will have wasted $10,000 dollars. (I know I can’t afford to do that!)
Extending the loan will also cause you to be more upside down in your loan because you are paying off the car slower than you would with a 5 year loan. Just think, after 2 years of payments you would have a two year old car while still having to pay like you would for a brand new car. It makes it feel like you are paying for a new car when your car isn’t new anymore.
However, when you don’t like this feeling and try to trade it in you will realize that you can’t trade it in. Or if you can, you will have to roll over a huge amount from that loan to the loan on a new car. You NEVER want to do this! It would be like paying for rent for a place you no longer live in or have access to. No way!!!
Don’t talk payments talk total price
I’ve heard others give this advice before but it’s because it is completely true. The first car that I bought I let the dealers talk payments and I ended up paying way too much for the car. I will say, it is harder to negotiate on new cars than used. However, you should still focus your time on what you will actually pay total for the vehicle. Ask the total financing! Not just the payment each month.
Doing this will help prevent you from paying more than you should. It would also be beneficial to do your research and know what the going rate for the type of car you are looking for and what deals the near by dealerships are offering. This will give you some negotiating power.
Don’t let them talk you into a monthly payment without understanding all parts of the deal!
Know when to shop
When you shop near the end of the month dealerships are more willing to work with you because they NEED to make sales. Usually, dealerships are under their quota for the month and will do everything they can to make a sale.
Also, if you shop near holiday’s you will most likely get manufacture deals on top of dealership deals. Memorial day is a great day to shop. Not only is it a major holiday for car buying, it is also at/near the end of the month! Even more reason for there to be great deals and the ability to negotiate well!
I have seen a TON of great deals this Memorial Day!
Don’t be scared to walk away
If you can’t come up with something that you feel comfortable with then you shouldn’t be afraid to walk away. You should never feel obligated to agree on a price. Say no and mean it! If they really want to make a deal they will keep working with you. If they can’t get you a price you are comfortable with then you need to keep searching for something that you can afford.
Even if you really want the car and are completely in love, you need to walk away. Don’t get trapped into a payment that you are not comfortable making just because you have to have the car. It will not be worth it!
Trust me, it’s happened to me. I got excited and giddy and had to have the car. A car that I really couldn’t afford. So I chose to drag the loan out for 7 years (terrible idea!!) to then still agree to pay about 50 dollars more than I really wanted to pay a month. All for a car that would lose more than half of it’s value in just two short years. Luckily I still love the car. Just hate that I feel like I’m paying too much and wasting my money.
Don’t fall victim
Please, learn from my mistakes and don’t end up in the same boat! I know that buying a car can be extremely exciting but if done right, you won’t end up regretting your decision.
Don’t allow yourself to get caught up in all the fun of it and remember to check the resale value of the car so you don’t get caught up in a loan on a car that loses half it’s value early on. Never, I repeat NEVER, agree to a seven year loan. Remember, if you can’t afford the 5 year loan payments then you CAN’T afford the car. Don’t talk payments, talk total cost and remember the best times to shop. This weekend being one of those great times to buy. Finally, if the dealers are not willing to work with you to make a deal then be completely prepared to walk away. Don’t let that love for the car allow you to make a bad decision. (you know like that boy did that one time!)
So basically if you don’t go into buying a car like you did that failed relationship by staying focused and you learn from my mistakes. You should be good!
P.S. If you need some help creating a budget so you know what you can afford, check out this post! It will help you create a budget even if you aren’t any good at budgets!