The first major purchase for many of us is a car and the primary thing to keep in mind is that a car is not an investment. A car only loses value the longer you keep it and the more wear and tear it has. Before you buy a car, we want to take you through some terminology so you feel more comfortable dealing with a car dealer.
MSRP (Manufacturer’s Suggested Retail Price)
This is the total price an automaker gives a vehicle depending on the model and trim line. Since it is a “suggested” price, dealers often have the chance to sell a vehicle for higher or lower price than the MSRP.
The “total MSRP” is commonly called the “sticker price” because it’s the bottom-line figure on a car’s window sticker. It is the base price plus any options, option-package discounts, and destination charge. Make sure you never pay sticker price!
Dealer Invoice Price
The invoice price is the number printed on the dealer’s invoice from the manufacturer. Salespeople will often show you how much they paid for the vehicle as a way to let you know there is only a small markup. However, be advised that that price is not necessarily what the dealer paid for the vehicle. The invoice might not show sales incentives or holdbacks that give the dealer an additional profit.
Tax, Title, and Tag Fees
When purchasing a vehicle, the tax and tag fees are calculated based on a number of factors, including:
- The county the vehicle is registered in.
- The vehicle weight.
- The type of license plates requested.
- Whether or not you have a trade-in.
- The state in which you live.
- New car sales tax OR used car sales tax.
When you make a spending plan for purchasing a new vehicle, be sure to factor in state taxes, titling and registration fees, vehicle inspections, and car insurance in the total cost. You will find that the total fees will increase significantly.
This additional insurance covers the difference between what you owe on the car and what the car is worth at the time you have an accident or the car is stolen. It is important to keep in mind that a car loses value the minute your drive it off the lot, therefore; it is likely that you will owe more than your car is worth starting on day one.
Today new cars come with a good warranty that cover the entire vehicle for a number of years and up to a certain number of miles. Dealerships also offer extended warranty plans that cover the car for additional years and miles for an additional cost. You should always do some comparison shopping for the best price and coverage on an extended warranty. Make sure any warranty you purchase covers mechanical breakdown as well as wear and tear.
To determine your monthly payments on a vehicle use our calculator below:
Under the car loan amount, be sure to include the total amount to be financed. Please note this is just an estimated payment.
How Much Can I Afford?
A good buying decision starts before you ever leave your house or take a test drive. First you’ve got to have a spending plan. With a spending plan you can determine what you can afford as a monthly payment, help you decide whether to buy a new or used car, and helps you see if you have enough for insurance and maintenance. Click here to download our template.
If the results from your spending plan reflect a negative number you should not be shopping for a car until you get your finances under control. Focus on paying off existing debt before you take on any new debt.
Saving For a Down Payment
When preparing to purchase a car it is always good practice to save for a down payment. The larger the down payment, the lower your payment and financing charges will be. A large down payment also makes it easier for you to qualify for a car loan.
Getting Advice Before You Buy
Before taking the big leap, make sure you research, research research. Your goal is to get a vehicle you can afford or fits well within your spending plan AND get a good deal, right? Don’t walk into a car dealership without being prepared. Start by knowing your credit score. The lower your credit score the likely hood of you being able to negotiate a good deal will not be in your favor or you may not qualify for the purchase of the vehicle. Next, if you are trading in your vehicle investigate the Blue Book value in your zip code to see how much your current car is worth. Visit Kelly Blue Book at: http://www.kbb.com
Now, it’s time to select a car! Choosing from cars only in your price range might be challenging. But, you must always remember to buy what you can afford. Here are some questions and tips you should follow:
- Check your spending plan
- Is the car new or used?
- Do you want to purchase or lease your next ride? What type of incentives are being offered?
- Take your time and don’t be pressured
- Know your credit score. It will determine the interest rate on your loan. Remember, the longer you finance your car, the more you are going to pay for your car both in the interest rate charged on your loan and in actual monthly out of pocket costs,
- Check with your insurance company to find out the cost of insurance on your new vehicle
- Does the car require regular or premium fuel? Remember, you will be paying more to fill up your vehicle with premium fuel every time you pull into the gas station.
- What about gap insurance?
- What about credit life?
- And don’t let the salesperson talk you into buying a more expensive car.
Here’s what a good deal looks like:
But wait, from your research you’ve seen that others have bought the same car for $19,000! So, it’s now time for you to negotiate a good deal.
Facts About Leasing vs Purchasing a Car
If you are deciding whether to buy or lease a car, check out this chart. We’ve put together the major differences between both so you can weigh your options.
|Ownership||Once you finish paying it, you own the vehicle and get to keep it.||You don't own the vehicle. You get to use it but you need to,return it at the end of the lease, unless you want to buy it.|
|Up-front costs||Include the cash price or a down payment, taxes, registration,and other fees.||Typically includes the first month's payment, a refundable,security deposit, a down payment, taxes, registration and other fees.|
|Monthly payments||Loan payments are usually higher than lease payments because,you're paying off the entire purchase price of the vehicle, plus interest and,other finance charges, taxes, and fees.||Lease payments are usually lower than loan payments because,you're only paying for the vehicle's depreciation during the lease term, plus,interest charges (called rent charges), and fees.|
|Early termination||You can sell or trade in your vehicle at any time.||If you end the lease early, early-termination charges are,usually very expensive.|
|Vehicle return||You'll have to deal with selling or trading in your car when you,decide you want a different one.||You can return the vehicle at lease-end, pay any end-of-lease,costs, and walk away.|
|Future value||The vehicle will depreciate but it’s cash value is yours to use,as you like.||The future value doesn't affect you financially. However, you,don't have any equity in the car.|
|Mileage||You can drive as far as you want as use plenty of miles. But,,remember high mileage lowers your trade-in value.||Most leases limit the number of miles you may drive, often,12,000 to 15,000 per year.,You'll have,to pay extra for exceeding your mileage.|
|Excessive wear and tear||You don't have to worry about wear and tear, but it could lower,the vehicle's trade-in or resale value.||You are held responsible. You'll have to pay extra for exceeding,what is considered normal wear and tear.|
|End of term||At the end of the loan term, you don't have to make any,additional payments.||At the end of the lease (typically 2-4 years), you'll have to,finance the purchase of the car or buy a new one.|
|Customizing||The vehicle is yours and you can modify it as you like.||Any changes or custom parts you add to the car will be need to,be removed before you return the car. If the changes caused any damages,,you'll have to pay to have it fixed.|
Trading In a Car Upside Down/Right Side Up
Trading in a car “upside down” means you owe more on the vehicle than what it’s worth – otherwise known as negative equity. For example, you have $16,000 worth of car payments to make on your car but it is only worth $9,000 (because your car depreciated). This means, that you are $7,000 upside down. If you decide to trade in this car and buy a brand new one, you will have to pay the price of the new car PLUS the $7,000 you owe on your current car. The end result will be that your monthly car payments will be much higher because you will need to roll over the money you owe on your old car to the loan on your new one. Not a good idea, huh?
So, how can you fix this to be right side up? You probably don’t want to hear it but – STICK WITH YOUR CURRENT CAR. It’s only until you break even. In an ideal situation, you would keep your old car if it’s valued more than what you owe on your loan. You want to get right side up fast? Start making larger monthly payments on your loan or maybe consider refinancing the loan. This will probably lower the interest rate and bring down your monthly payments.
Financing Your Car
While the ideal situation would be to buy a car with cash, few people can actually afford to do so. To help you avoid any costly disasters, here are five steps you should follow before you actually finance your car.
- Know your credit rating. Before you do anything else, feel free to contact COSTEP. We can help you check you manage your credit to prepare you for that new car purchase. We are a not-for-profit organization based in McAllen, Texas that provides financial literacy assistance and credit counseling. You need to make sure you learn what your credit score is before buying that new car. Click here to set up an appointment.
- Make sure you have a spending plan. Click here to determine how much vehicle you can really afford.
- Decide on the length of your loan period. Longer period means lower monthly payments. However, you’ll pay more in the long run.
- Consider all costs involved in the purchase. Make sure you include insurance, maintenance, repair and fuel costs as well as and annual licensing fees.
- Shop wisely for the best source of funding. Research several banks and dealerships in your areas to make sure you get the best deal.