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Buying a Vehicle
CEA-FCS
Wednesday, December 19, 2012 • Posted December 19, 2012

This time of year we can often get a good deal on a new or used vehicle. This happens to be on my mind as I just went through purchasing another vehicle myself. These are tips from the FDIC for young people looking for their first car, but I thought they would be helpful for most anyone. Of course I added my thoughts into the mix!

Many young people look forward to getting their own car but overlook what they may need to do to comfortably afford it, especially if they’ll be borrowing money. Here are strategies to consider well before you go to the dealership.

Start saving early. “The more money you put down, the less you have to borrow — and that means the less money you’ll pay in interest on a loan, if you need to borrow at all,” said Phyllis Pratt, an FDIC Community Affairs Specialist. For tips on saving money for a car (or any other major purchases), see Simple Ways to Rev Up Your Savings at www.fdic.gov.

Decide how much you can afford to spend each month on a car. In addition to car payments, consider how much you’ll need for insurance, taxes, registration fees, routine maintenance and unexpected repairs. Online calculators can help you figure out what you can afford.

There are alternatives to buying a car. Lease payments may sometimes appear lower than loan payments, but at the end of the lease you will not own the car and you may have to pay more money for excess mileage or body repairs.

Shop for a loan at your bank as well as several other lenders. Compare the offers based on the Annual Percentage Rate (APR) you’re quoted by each lender. The APR reflects the total cost of the loan, including interest and certain fees, as a yearly rate. Then consider getting “pre-qualified” by the lender offering the best deal. That’s not the same as a loan approval, but it will expedite the process once you find a car you like.

Before you start shopping for a loan, review your credit report to correct wrong information, which can help you qualify for a lower interest rate. To obtain a free copy of your credit report from each of the three major credit bureaus, visit www.annualcreditreport.com or call toll-free 1-877-322-8228. Don’t get one from the companies that advertise on TV as a “free” credit report, they are actually trying to sell you a service for something you are entitled to once a year for free. You can look at all three reports once a year for free, so if you space them out you can get more continual feedback to make sure there are no problems. Your credit report is important for more than just loans- some companies look at it to help decide if they want to hire you for a job! A strong credit score also can help when you apply for an insurance policy or an apartment.

In addition, a dealer’s special financing (such as zero-percent interest) may not be the best value if it means foregoing a large extra discount on the car. In that situation, you may come out ahead if you borrow from a financial institution, even at a higher interest rate, and save on the purchase price. Do the math and see which one will save you more- if the loan is for a longer period of time it may be better to take the lowest percent interest loan. Car companies get an incentive for you to borrow from their lenders, so make sure you have looked at other options before you go to the dealership. If you’re like me, you may get there and find something you really want, so it’s better to already have a loan plan option other than what you can get through the dealership before you go shopping. Also, don’t purchase a more expensive car than you feel you can comfortably afford, even if you qualify for a larger loan.

Whether you are buying or leasing, negotiate with the dealer based on the total cost of the car, not the monthly payment. Why? “By extending the length of the loan, a dealer can offer a more expensive vehicle with the same monthly loan payment you were quoted for a less expensive car, but you will pay more in interest costs,” said Luke W. Reynolds, Acting Associate Director of the FDIC’s Division of Depositor and Consumer Protection.

It drives me crazy when you are negotiating the cost of a car and the salesman wants you to focus on the monthly payment! Look at the total cost first and foremost, and get the best deal you can, and then make sure the monthly payment is within your budget.

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