A Short Financial Guide For First Time Car Buyers
Buying your first car on your own is a right of passage. For many buyers, it can also be a stressful or even intimidating experience. The key to getting through the process smoothly and coming away with a great deal and a great car is proper preparation for these car services. These tips will help you financially plan for your purchase so that you can work with a dealership to find the vehicle you want without breaking your budget.
Start With a Budget
When it comes to car purchases, there's more to budgeting than merely deciding on the amount of money that you want to spend. Limiting yourself to a maximum dollar amount is enough if you intend to pay with cash, but most buyers will be financing or leasing their vehicles. In this case, it's essential to limit yourself in two ways: the maximum total purchase price that you can afford and the maximum monthly payment that you can afford.
As a rule of thumb, the maximum purchase price should be no more than 40% of your annual gross income, while your maximum monthly payment should be no more than 15% of your monthly gross income. These are only guidelines, but they are worth keeping in mind as you plan your purchase.
Consider Prequalifying for Financing
Many dealerships and lenders offer financing prequalifications. Prequalifying does not guarantee that you will receive financing, but it is generally a good indication of the maximum loan you can take out and your likely monthly payments. The primary advantage of prequalification is that it is a "soft" inquiry on your credit report and so will not affect your credit score. If you have a preferred bank or credit union, then applying for a loan before going to the dealership can be a good idea, but limit yourself to a single lender to reduce the impact on your credit score.
Remember that the offers that you receive should not affect your budgeting; just because a lender has approved you for an oversized loan does not mean that you need to spend the entire amount.
Don't Ignore Dealer Financing
Arriving at the dealership with a financing offer in hand is a good idea since it provides you with a baseline and gives you the freedom to negotiate, but this doesn't mean that you should ignore dealer financing altogether. Making use of a loan from the dealership often means that you will qualify for dealer incentives and other bonuses.
Since you want to minimize the number of hard inquiries that will show up on your credit report, avoid applying for dealer financing until you are sure you have found the car that you want. Likewise, the cost of the car you are considering must be both within your budget and affordable with your prequalified loans. Taking these steps guarantees that you can afford to purchase the vehicle before you begin working with the dealership's financing department.
Negotiate on Price
Finally, avoid the trap of negotiating with monthly payments. Instead, focus on settling on the final price of the vehicle, including interest charges. If you have adequately budgeted and qualified for lending, then you should already have financing lined up that is within your budget. This will allow you to negotiate with the dealership to arrive at a final price that you are comfortable with while also having a backup offer available. By working "backward" from the total vehicle cost, you can ensure that you walk away with the car that you want without spending an arm and a leg.