Before Financing Your New Car
How old is your current automobile? Has it been a few years since your last car purchase? Are you still debating between financing, leasing and buying the vehicle outright?
Before financing your new car, consider why you want to buy a brand-new car in the first place.
You probably have many reason for a new car and hopefully your ego is not one of them.
Maybe you just got a raise at work.
Perhaps your old car just is not working the same as it used to and you are dumping too much money into fixing it.
Your car could have been in accident and insurance paid you out and now you need transportation.
I believe, in North America, a car is important to most people. Although, some people can get away public transportation, for most people, the car is an extension of themselves just like a smart phone is.
Even if a car is important for you to have for work, family outings or travel, you do not have to put yourself in a financial bind to get around.
In this article, I will present you 5 essential concepts to consider before financing your new car. My hope is that you will consider your current and future financial situation, before you make your next vehicle purchase.
5 Thoughts to Consider Before You Finance
Cost to Borrow
When you finance a car, it can cost you between 0.99% and 8%, or more, to borrow the money for financing the car purchase. When you borrow money, it means you pay interest to have monthly payments.
Let’s say you are looking at a $30,000 vehicle and financing it over 60 months with a 0.99% interest rate.
This means you would pay an additional $760 on the full purchase price of the vehicle.
On a $60,000 vehicle, you end up paying $1,522 more at the end of the 60-month period.
Let’s consider the fact that you may not have the best credit. The same $30,000 vehicle at an 8% interest rate and 60-month term, could cost you an additional $6,498.
On a $60,000 vehicle, you are looking at well over $12,000 on top of the full vehicle price.
If you need a new vehicle and need to finance it, talk to your accountant and if you can write off interest through a business.
If the dealership is charging you 6% or higher, and you have access to a line of credit (LOC) with your banks with an interest rate that is much lower, consider using your LOC.
Commit to Monthly Payments
When you buy a vehicle, the term of the contract will vary from 12-96 months. The longer the term, the longer it will take you to pay the car off. You will also pay more in interest payments.
It is possible that anything can happen in life and you may lose your ability to make those monthly payments. The longer the commitment time, the more risk you take in not being able to make your payments in the future.
How will you make your monthly payments if you lose your job?
Will you be able to make your monthly payments or will the bank have to repossess your vehicle?
Consider the possibility of losing your job and not being able to make payments before financing your new car.
Also keep in mind, not only will you have to continue to make payments on your car after you lose your job but you would have to make payments on a depreciating asset/liability.
Worst case is you sell your car if you lose your job. Usually when people sell their car, they do not get what they own on the vehicle and end up upside down on the purchase.
The Automobile Loses Value
I believe most people have heard that, as soon as you drive your new vehicle of the lot, your car will lose 20% of its value in depression.
This does not happen when your drive your new car off the lot. It happens before. It happens when you or the dealership register you as the new owner of the automobile.
Before financing, consider the fact you will be making payments on a vehicle that is worth 20% less than the value you bought it for.
That means you make payments on the purchase value of the vehicle. You do not make payments on the market value of the vehicle.
Look at A Used Car
When you buy a new car from the dealership, the dealership has the upper hand. They dictate the price they will sell the car to you for. This means your purchase price, financing options, term and monthly payments not fully in your control.
Looking at a pre-owned vehicle is not always the most popular option but consider this option before financing your new car.
Look at the dealerships used car lot, Autotrader, Craig’s List, Kijiji and other similar sites. Based on my previous experience, you can find great options that are between 1 and 5 years old.
One of the reasons a used car can be better is because you have the ability to pay cash for the car. In most cases you are not going to pay any interest to finance it as it is can be a private deal.
If you are buying a pre-owned car from the dealership, they will usually give you financing options but the interest usually ranges between 6-8%.
Why use cash? Simply because cash is king. Money in hand speaks when it comes to negotiation a price with the seller. The seller wants your money so they are likely to lower the price to get a quick sale.
Used Vehicles Hold Value
Here is another reason to consider a used car. A used car that is older than 10 years old tends to hold its value after purchase. So even if you drive it and then sell it you can still get your money back in most cases.
If you are purchasing a used vehicle which is over 10-12 years, you can usually request an inspection report from the seller.
This will allow you to know before making the cash purchase if the car your buying is any good or just a lemon.
The inspection will give you leverage in the price if there is anything that has failed.
Unless you are looking to buy a one of a kind exotic automobile, you may want to consider not financing the purchase of the automobile.
I have sold cars and worked at two different bank. I speak from experience based on helping thousands of people over the 7-year period.
It is best to only spend the money you have verses financing a car you cannot afford.
If you can purchaser the vehicle with cash, you might want to consider if the purchase is a sound decision for your financial future.
Although you might have the cash to purchase a car and believe you will be debt free, keep in mind you never know what life will bring your way. You might need some of the cash you spend on the car.
Do you know anyone who is about to buy a new car? Share this article with them before they do so they can consider a few things and make an educated decision.
Will you reconsider your options before financing your new car? Leave a comment below.
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