So you want to buy a car. Congrats! You now have a series of decisions to make. For one, will you buy or lease? Opt for something used or with that new car smell? Go the dealer route or browse on Craigslist? Hang fuzzy dice on the rearview mirror or go for a more minimal look?
For these answers and more, we tapped the expertise of Kristen Lanzavecchia, Manager, Industry Insights at TrueCar and one of Auto Remarketing’s 40 Under 40. Below, here's the ultimate guide to buying a car. (Once you have a car of your own, you can channel your inner Regina George, pull up to your friend's house, and shout "Get in loser, we're going shopping." Among other things.)
Okay, so what's step one?
"First step is to figure out what you can afford so you can begin to narrow down your shopping list. While most people think in terms of a monthly payment, you should actually consider the total price first — including taxes, fees, and any potential interest. Pro tip: If you own a vehicle already, leverage tools like TrueCar’s True Cash Offer that can give you your car’s value and can execute a trade-in from local dealers. That money can then be put toward the purchase of your new ride."
How do you get a car loan?
"Your car loan plays a big part in your overall cost of ownership. Two key things matter here: Your credit score and the length of your loan. Why? Because these two things are some of the biggest factors in determining how much interest you’ll pay on that loan each month.
"Here is a car loan checklist:
1. Connect with your bank or credit union before visiting the dealership to see what you can qualify for. In many cases, you can also get pre-qualified and compare that loan offer to what the dealer eventually will offer you.
2. Once at the dealership with your car picked out, ask about any special financing offers, since many automakers routinely have these available. Dealers will work with you to see what interest rate you can qualify for.
3. Try to keep loan terms as short as possible. While that means higher monthly payments, it often also means lower interest paid over the life of the loan. These days you can stretch out the loan term to 84 months and even longer to get to a monthly payment that’s affordable. Just keep in mind that you’re paying more interest and you’re going to be paying a car loan for a long time before the car is yours free and clear."
"You may not always be required to put cash down, but 20 percent of the purchase price is generally a good rule of thumb. A larger down payment will save you money in the long run. Pay for taxes, fees, and extras with cash if possible. Dealers can roll those fees into the financing if you’d like, but that increases your loan without changing the value of your car."
What's the difference between buying and leasing?
"Buying is like owning your home and leasing is more like renting. Simply put, when car buying, you’re either borrowing money from a lender to help you purchase your vehicle, paying all cash, or some combination of the two.
"Leasing is for a fixed term, generally two to three years, and you’re only paying for the portion of the vehicle you’re 'using' during that term, generally at a fixed interest rate (money factor). And what you pay is heavily based on the vehicle’s residual value (expected resale value) at the end of your lease term. Also, if you lease a vehicle every three years, you’re always driving a vehicle that’s under warranty, with maintenance sometimes bundled in.
"Leasing makes up about one-quarter of all new car purchases today, and we’re seeing 25- to 34-year-olds leasing at even higher rates — about one-third leasing versus paying cash or financing. But often times, there can be nothing like having something as your own, and if you’re trying to secure the lowest long-term cost, buying and keeping your cars longer may make more financial sense. But again, this underscores the importance of the research and due diligence prior to purchase and requires you to be more-forward thinking about expenses like maintenance and repairs."
If you're going the car dealer route, what are questions you should ask?
"What’s the vehicle’s history of ownership, service, and repairs? Have there been any accidents, and what was the nature of them? Do you have a vehicle history report? Are there are any special offers? (These offers are most commonly found on new cars and Certified Pre-Owned vehicles and can come in the form of a cash discount, loan discount or a combination of the two, as well as lease benefits.)
"If you’re purchasing or leasing from the same brand or one of their competitors, are there any special 'loyalty' or 'conquest' offers?
"What fees are included in the total price?"
What about if you're going the Craigslist route?
"If you’re purchasing a car from a private seller versus a dealer, you should know that private party sales are almost always 'as is' — meaning, once you’ve bought the car, you likely won’t be able to return it. So make sure to be very thorough in your questions and assessment of the vehicle. One question to ask outright: Why they are selling the vehicle?
"You’ll still want to get the full vehicle history (repairs, accidents, flood damage, maintenance schedule) as you would at a dealership. You can get this information via the car’s VIN (vehicle identification number). For some additional peace of mind, you might consider asking the seller if you can pay for an inspection at a trusted mechanic.
"If you buy from a private seller, once you finalize the purchase price with the seller, you’ll need to handle all the closing paperwork yourself. That means: processing the financing, taking care of the title, and paying taxes through your state DMV. Pro tip: write out a contract between you and the seller detailing the terms you’ve agreed upon."
How does auto insurance work?
"Most states require car insurance by law. What you pay will depend on a combination of demographic factors, vehicle specific factors, and your personal driving habits. For example, your age, gender, marital status, profession, credit score, and where you live make up some of the demographic factors. Car-related factors include the age of your vehicle, the cost of the vehicle (what it would cost to replace), and the likelihood of theft of that vehicle (some cars are stolen at much higher frequencies that others). Personal driving habits include how often you drive, where you park your car, and your driving history (accidents, tickets).
"So what you pay will vary greatly from person to person, car to car, and by location, but according to AAA, the average cost to insure a sedan in 2016 was $102/month or $1,222 a year. Once you know what vehicle you want to buy, you can get quotes for that vehicle so you have an accurate idea of what you can expect to pay for car insurance. And remember, if you finance or lease your new vehicle, most banks require that you carry higher levels of comprehensive coverage. Liability insurance alone won’t cut it."
What's the best time of year to buy, and are there laws that you should be aware of when buying?
"The end of the month is always the best time to purchase from a transaction price perspective, and the end of the year often sees some of the steepest discounts, but your options in terms of what’s still on the dealer’s lot will likely be more limited. Automakers also tend to provide special incentive offers in conjunction with big holiday weekends.
"As for laws, here are a few: There are tax advantages to buying and trading in your vehicle at the same time at a dealership. Most states require sales tax to be paid only on the difference between the price of your trade-in and the vehicle you're purchasing, not the full price of the next car. This tax advantage doesn't apply if you sell your old vehicle yourself.
"For leasing, the tax percentage is variable by state with some states taxing the full price of the vehicle versus the portion that is just used during the lease term.
"Lemon laws are meant to protect new car buyers against major defects that impact the vehicle’s use, value or safety. These laws vary greatly by state, but all 50 states [and] the District of Columbia have some form of the law. Some states offer protections for used car buyers as well. There are exceptions to some of these laws, so you should contact your state attorney general to learn more about these laws in your state."
How much of your salary should you spend on a car?
"Most personal finance experts would tell you not to spend more than about a third of your pre-tax annual income on a car, but it really depends on what other expenses you are juggling, and what percentage of your salary they make up. Do you have a home or student loan to pay off? Do you have kids or other family members to take care of?
"From the lender’s perspective, one ratio they look at when reviewing credit applications is the monthly payment to income ratio (an estimated car and insurance payment and divide it by your pre-tax monthly income). They generally don’t want this number to be higher than 12-15%. So if you make $3,000 a month, most banks won’t be comfortable with a payment more than between $360 to $450 a month."
What are the most popular cars among millennials?
In 2018 the most popular vehicles amongst millennials (ages 25-34) were the following:
1. Ford F-Series
2. Ram 1500-3500
3. Chevrolet Silverado
4. Honda Civic
5. Toyota RAV4
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