If buying a car is on your radar for 2016, you probably couldn’t have picked a better time to get a fresh set of wheels.
Interest rates remain low. Gas prices are still cheap, and hover well below $3 a gallon in most states. And car-buying discounts, rebates and incentives are plentiful — even though 2015 is shaping up to be a banner year for car sales.
In October alone, 1.46 million vehicles were sold in America, causing experts to forecast that more than 18 million cars will be sold nationwide in 2015.
“October marks the 22nd consecutive month of record-setting revenue, and the industry remains healthy even with an uptick in incentives,” said Larry Dominique, Executive Vice President at TrueCar, on online car-buying service. “Automakers are enjoying double-digit revenue gains in advance of the holiday season. Historically, December is a strong month for the industry in terms of both sales and revenue.”
But a big key to ensuring that this strength continues in the new year is a strong consumer base that is able to pay their auto payments and all other debts on time. So whether you have your eye on a new car, truck, SUV or minivan, you need to make smart financial choices – ones that you won’t later regret.
Here are 5 tips to make sure you can truly afford your next new vehicle.
1. Shore up your credit rating.
Eighty-five percent of all new vehicles purchased in America are financed, according to the National Automobile Dealers Association. But before you can get approved for a car loan, your credit has to pass muster. Well before you hit the road for a test drive and enjoy that nice new-car smell, do yourself a favor and pull your credit reports from AnnualCreditReport.com.
Federal law entitles you to one free credit report each year from each of the three main credit bureaus: Equifax, Experian and TransUnion. If you spot any errors in your credit files, dispute those mistakes immediately. You don’t want unwarranted blemishes in your credit reports to make your car loan application get rejected, or to cause you to have a higher interest rate than necessary.
2. Carefully consider your financing source.
Since most people will need a loan to purchase a new car, it’s wise to weigh your car financing options before settling on the exact vehicle you want. In the world of auto financing, you have two options: You can take the direct lending route, where you get financing from a bank, credit union or finance company. Alternatively, you can secure dealer-assisted financing.
Some consumers like having their financing done upfront – before they walk into a car dealer. That way, they can focus on getting the car they want at the right price. Many banks and credit unions also let you apply online for a vehicle loan, right from the comfort and convenience of your home, or just by using your smartphone or tablet.
What’s more, various lenders offer perks for existing customers. For example, Chase extends rate cuts of up to 0.50% off standard rates to clients with checking accounts. The Chase website also provides an online Auto Loan Payment Calculator, so you can see what your monthly vehicle payments can be before you even apply.
But according to the National Automobile Dealers Association, most consumers get a better rate at their local dealerships for two reasons.
First, dealers can shop a customer’s credit application to dozens of lenders, often helping car buyers find the lower interest rates than consumers can find on their own. Additionally, dealerships can discount their interest rates in order to match or beat competing offers a customer may have received from other lenders, like a bank or credit union.
No matter which car financing option you choose, it’s ultimately up to you as a consumer to do your homework in order to find the best loan rates and terms available in the marketplace.
3. Separate your needs from wants.
Once you start shopping for a vehicle, you’ll encounter a dizzying array of options, including some extras that a car salesman may show you or suggest. In addition to that sunroof and the leather interior you wanted, you may be offered rust proof packages, road hazard warranties, maintenance agreements, and more.
To avoid going overboard, make a list ahead of time of the items that you truly need, versus those accessories and options that would simply be nice to have. By carefully considering your needs ahead of visiting a car dealer, you’ll be able to avoid purely emotion-driven decisions or choices that aren’t well thought out and that don’t fit into your budget.
4. Decide on a maximum car loan length.
A decade or more ago, most car loans were 48 months or 60 months in length. These days, an increasing number of car loans last for 72 months, or even 84 months. Even though longer term car loans are growing in popularity, be careful of getting into a 72-month or 84-month car loan just so you can afford the monthly payments or get into a more expensive car than you originally planned to buy.
If you’re stretching for a longer-term loan under these conditions, you’re probably buying a car that is out of your price range.
With many people trading in their cars every two or three years, you don’t want to wind up being in a negative equity position – meaning you owe more on the car than it is worth. Even if you keep your car for the length of a six or seven-year loan, you don’t want to pay more interest than necessary over the life of that loan.
5. Be realistic about your overall budget.
Finally, as you weigh how much car you can afford, remember to include all aspects of car ownership – along with the rest of your financial picture. So check on insurance rates, think about how much it will take to fill up your tank each month, and consider how much wear and tear you’ll put on your vehicle. The latter will determine a lot about your maintenance costs and needs.
Take into account other aspects of your budget too. If you have other debts, such as student loans or credit card bills, be judicious about how many obligations you want to take on simultaneously.
To make your car-buying process satisfying from beginning to end, you need to be an educated consumer who gets the right car, at the right price, so that car ownership is affordable, sustainable, and doesn’t become a burden.