Cars have advanced significantly over the years, especially in the last decade or so. So, there is a good chance that your aging car is out with the times, lacking several new features found in new cars especially the advanced safety equipment that usually comes as standard with new cars.
Modern SUVs and pickup trucks like the 2021 Chevy Traverse, and the 2021 Toyota Tundra are excellent purchases, offering both practicality and comfort while staying reliable for a very long time. Maintenance will also be on the easier side as the years roll by.
But before you jump the gun and purchase your next new car, there are certain steps you should take to avoid wasting a lot of money and ending up in a world of debt with a car you didn’t want. In fact, a recent survey found that many Americans trade in their old car before completely paying it off!
Which will add up to their next financing plan, making it that much more difficult to pay it off. This usually happens when you buy a car you can’t afford or trade it in too early, especially for luxury cars with a higher depreciation hit.
With all that in mind, here are 5 steps that you should take to avoid paying more than you should, and find the right car for you.
Make sure your finances are in order
Before you even think about buying a car, make sure you can pay for it without further getting into debt. One of the questions that usually arise as you start planning is ‘How much should I spend?”. It is a tricky one, to say the least. Because if you become infatuated with a car you can’t afford, you’ll be struggling with finances for years to come.
A good idea to counter this is to go to your bank before hitting the dealerships and getting a preapproved loan sanctioned. This way, you’ll have a clear idea of how much you can spend and avoid going over budget. Pre-approved loans will also reveal if your credit is too low. Make sure you go with a mainstream bank or other lenders who are easily recognizable as it is easy to get scammed especially when looking online.
Also keep an eye out for the best rate, as it is common for dealers to charge more interest than they should, depending upon your credit. Most times customers don’t even realize it until it’s too late and lose a lot of money.
Going to the dealer with a preapproved loan can help you avoid all these pitfalls, and in some cases, the dealer can actually get you a better interest rate, if of course, all other terms remain the same.
Finding the right car
The next step is to visit the dealerships with your pre-approved loan in hand and start looking at various options that are within budget. There will be several options in the market, from comfortable sedans to practical crossovers and off-road-ready SUVs, make sure you choose the car that fits your needs. And don’t reveal too much about your finances as you start shopping, as some dealers will charge you more.
The first question you’ll be asked is whether you’re trading in your old car or getting a loan from them, which is all the more reason why you shouldn’t reveal your pre-approved loan as soon as you enter. Concentrate on the car first, and try to avoid all these questions till you finalize the deal.
Their modus operandi is to squeeze as much money out of you as possible, and they’ll usually get a cut of the finances if you get a loan from them. Which is another reason why you should get a preapproved loan sanctioned.
Once you finally find the car you want, the next step is to negotiate trade-in rates. Make sure you check the trade-in value online before negotiating. Several websites like Kelley Blue Book and Edmunds will give you a quick estimate on how much your car is worth. Alternatively, you can also take it for a thorough check to CarMax where they will provide an actual value. Of course, there will always be some wiggle room in these prices depending on the condition, so keep that in mind.
You can avoid the trade-in if the offer is too low, and the deal is too good to give up and sell your car by yourself. In fact, in some cases, it’ll be even more profitable if done this way.
The used car market is always an option if you’re on a tight budget, especially when looking at reliable car brands like Honda and Toyota.
Optioning out your new car
Once you start negotiations about your new car, most dealerships will throw in certain add-ons and extras including extended warranties, protection plans, and a lot more. As expected, the dealership takes a huge cut off this and as such, it will be overpriced.
So a top tip is to not bother with any of the add-ons unless you absolutely need them. Of course, their finance department will try to convince you that it’ll only be a small mark-up every month. But, it’ll add up considerably over the years, especially if you take a long-term loan.
Most manufacturers also allow extending the warranty after purchase, before the factory warranty runs out.
Avoid making long-term loans
There’s a very dangerous trend rising nowadays, where a lot of customers take long-term loans that usually last more than six or seven years. Even though long-term loans will reduce monthly payments, you’ll end up paying a lot more as the years go by.
Seven-year loans have gone up considerably in recent years, with a sharp 31.5% increase since 2009. If your only option is to take a long-term 6 or 7-year loan, it is a good indication that you can’t afford the car you-re financing. A recent survey found that customers buying cars costing more than $38,000 opt for long-term loans.
Also if you sell your car before the loan ends, you’ll end up paying for a car you don’t even own anymore, leaving you in a complicated financial situation. Ideally, the best option is to take a 5-year loan where the payments are not too high, and the resale value will still be high at the end of 5 years.
Make sure you completely read the contract before signing it, as a lot of dealers are known to make changes, and include packages like extended warranties without you noticing.
Avoid spending too much
Always have your finances in order, and only buy the car you can actually afford. It is not unusual to be wooed by more expensive cars at the dealership and go above your head. Also keep in mind that car ownership includes several other expenses like insurance, fuel, and service costs which will cost several thousand a year in addition to the base price.
The general rule of thumb is to limit your car expenses to less than 20% of your salary which also includes other expenses explained above. What this essentially means is that your monthly car payments should not exceed 15% of your salary and should be kept in mind when financing your new car.
If you are short on cash, the used car market should be considered. With excellent deals on offer, and plenty of options to choose from. Modern cars are a lot more reliable than ever before, making used car purchases that much easier. Cars take a big depreciation hit during the initial 3-5 years, and it should be considered when shopping around for used cars. The three-year mark is usually the best option, and you can even get good financing options for used cars if required.
Even older Japanese cars like the Honda Civic and Toyota Corolla will serve you for a long time even if they have more than 100,000 miles on the clock.
With all these points in mind, you’ll be ready to take the plunge and invest in your next car.