Buying a car is a major purchase. Budgets are tight. It’s tempting to accept financing based on the lowest monthly payment, but this may prove a costly mistake. Here is why.
Lower monthly payments often mean longer loan terms and higher interest rates. You may be able to obtain 84-month term (7 year) financing and a budget-friendly monthly payment, but you’ll pay more over the life of the loan. You also risk becoming upside down on your loan, owing more money for your car than it is worth.
Don’t be payment-driven. Save up as much as you can and negotiate the sales price down, not the monthly payment.
Here are additional tips to help you keep your car buying costs as low as possible.
- Know your credit score. More importantly, know the details in your report. Your credit score will determine which loan you will qualify for and the interest rate you’ll pay. Start reducing your current debt now to improve your score and financing options.
- Get pre-approved. Know the exact amount you can spend before you start looking (and stay under that number). Start with your financial institution and shop around. A banker can also access car evaluations to improve your bargaining power with the dealership.
- Focus on price. Know what the car is worth, not what the dealer tells you it is worth. Do your homework. Check NADA guides. Shop online. Compare dealers. View the car evaluation with your banker. Then go to the dealership and negotiate a fair purchase price for the car, not your loan payment.
- Decide needs versus wants. You may want a newer model vehicle but do you want — can you honestly afford — the higher purchase price and possible higher interest rate? It’s a matter of choice. I encourage you to save up as much money as possible before you shop so you have more choices. With a higher down payment, you can borrow less money. You can choose a higher monthly payment with a lower term, which will save you more money over the life of the loan.
Avoid the payment-driven temptation and start saving up now for your next vehicle. In the meantime, explore your financing options and ask your banker what you can do to improve your credit score.
Final piece of advice: Don’t be afraid to walk off the lot.
Don’t rush your decision and accept the first offer. It’s your money and your life. Be good to yourself.
Our lenders are happy to answer your questions, even if you are not an RCB Bank customer. Connect with a lender in your area.