Editor’s note: This is the second of a two-part Perspectives on Personal Finance series on pointers for buying a new car. Read the first.
It’s an age-old debate: needs versus wants. Smart personal finance decisions focus on the former, not the latter.
This especially applies to buying a new car. Before you head over to your local car dealership, kick a few tires, and eventually sit down to sign on the dotted line, take some time to answer a few critical questions.
- Why are you buying this car? (is it a want or a need, in other words?)
- How much can you afford?
- Are there life changes on the horizon over the next few years?
You may find yourself tempted by a sleek new model with various upgrades and add-ons. But savvy consumers stay focused on the practical, rather than the bells and whistles. Sure, that sunroof or ragtop would be cool, but is it worth the extra cost if you can only open it three months out of the year?
Consider your work situation. If your office is close to home but a job change with a longer commute may be in your future, fuel efficiency comes to the fore. Also, seek preapproval from a lender before you even walk into a dealership. That could give you leverage for a better rate from the auto dealership, according to David Bennett, manager of automotive programs for AAA.
For example, suppose your bank preapproves you for an auto loan at a 3.9% rate. If you make the car dealer aware of that, they might counter with a 2.9% rate through their own financing arm. “You just saved 1%,” Bennett said. “On a five-year loan, that could be $600” in savings.
Check with your insurance company to find out how much this new model will cost you in car insurance. If you are driving a 10- or 11-year-old car, your insurance rates could jump. This will need to be factored into your monthly budget, so plan ahead.
Finally, remember to do your homework. There are three main negotiations relating to a car purchase: (1) cost of the car; (2) financing rate; and (3) trade-in value.
“You can negotiate all three separately,” Bennett said. “Most people can tell you easily what their monthly payment is, but how many can tell you what the final sales price is for the car?”
Focus on the final sales price during the negotiations. (AAA offers an auto buying program for its members, which includes prenegotiated savings at dealers, and some credit card companies offer free programs as well.) The best consumer is an educated consumer.
Finally, keep your emotions in check. A sexy, shiny sports car with leather interior is a sure-fire eye-grabber. But remember, “this is a business transaction,” Bennett said. “Don't get emotionally involved, because you have to live with the payment expense.”