I recently filmed a television segment for a local news program. The topic was buying a car — particularly a used car. As the ‘finance expert’, my job was to tell folks what financial issues they should keep in mind when considering a used car. Since I firmly believe that a picture is worth a thousand words (or more), I’ll let you take a look at the video and get it ‘straight from the horse’s mouth’. But I’ll summarize my advice here:
- Time your purchase. The best deals on automobiles are at the end of a calendar year, the end of a model year and the end of a month. That’s when dealers are most motivated to sell and are willing to make the best deals. They are attempting to reduce inventory, make quotas and improve their bottom line before reporting time. If possible, keep this in mind when you shop.
- Do your research. Be sure that you understand just how much you can afford before you start shopping. Will you make an outright cash purchase? If not, what monthly payments and down payment can you afford? Find out the current value of the car you are considering if you are buying used and the car you are trading if that will be part of the deal. You can find out the current retail and wholesale value of most cars at the Kelley Blue Book website. If you will be trading in a car, find out how much you owe on your current car loan if you have one. If it turns out that you owe more on your current car than it is work, that will put you at a slight disadvantage when you begin to work out the terms of the deal. This situation is referred to as ‘negative equity’ and happens frequently due to the rate at which cars lose value (pretty fast!) and how long it takes us to pay off car loans at time (pretty slow!). If you finance 100% of the price of a car and that car starts to lose value the minute you drive it off the lot, you will see your equity stake (car value minus what you owe) dip below zero in no time. This doesn’t mean that you can’t finance another car or trade in your old one. It just means that at some point you are going to have to pay for that negative equity. You may be able to add it to the new loan, increase your down payment by that amount of some combinaton. Another item that you should research before you shop is your credit. Know your credit score! It will have a big impact on the interest rate you will be able to get if you decide to finance your purchase. A score of 680 or better will be necessary to get the best rates. Check out Credit Karma to see where you stand on your credit and check out BankRate Monitor to see what the current interest rates are for vehicle loans in your area.
- Negotiate wisely. Lastly, try to negotiate the best deal. Focus on your needs and what works best for your budget. Often, salespeople will focus on the monthly payments, but be sure that you understand the other parameters that go into the equation. What is the term of the loan? What is the interest rate? Exactly how much are you financing? By making sure you understand all the details, you will be less likely to be saddled with hidden costs. Negotiate the price of the vehicle (based on your research on its value). Then, consider the financing separately. Once you know your credit score, you may find that you are better off obtaining your own financing as opposed to using financing arranged by a dealer. This is particularly true if you have a strong, long-standing relationship with your bank or credit union.
Those are the basics, so without further ado, here I am in action . . .