What to know before you buy
Buying a new car can be an exciting moment, but it can also be a daunting proposition. Here are some do’s and don’t’s to think about before you start looking for a car, and certainly before you buy a car.
Do – Know your credit score before you start looking for financing – your interest rate is going to be predicated on your credit score. Knowledge about your credit score is just as important as knowing what type of car you are looking for.
Do – Have a down payment – In 2008 Karen purchased a 2005 Nissan Murano. She purchased the Murano at just shy of $19,000. She put down $10,000 from the insurance settlement and put the remaining on her then boyfriends (now husbands) American Express credit card to get miles then used her Home Equity Line of Credit (HELOC) to pay off the American Express bill and wrote off the interest payments incurred on the HELOC.
Do – talk to your insurance company before you buy a car. If you’re driving a 10-year old minivan now and are thinking of switching to a brand new sportscar your insurance premiums are going to jump. Make sure you’re prepared for that.
Do – put the payment on your credit card if the dealership takes credit cards with no extra points. If you have a card that gives you cashback or airline credit’s put the car on the card, making sure, of course, that it is the day after your card closes. That way you have a full month before you get the bill and another 20 days before you have to pay it with the financing you’ve already acquired.
Your estimated monthly payments on a $10,000 loan at 4.75% would be $188 and you would pay $1,254 in interest over the life of the loan. That HELOC payment can most likely be written off on your taxes, but the total cost of your car is now $11,254.
That is a small amount of interest compared to what you would pay if you followed Kimberly’s financing method.
Don’t – Buy a car by refinancing your home for 15 or 30 years. People keep their cars nowadays for over 11 years, but refinancing your home for 30 years increases the amount of money you’re paying for a car.
Kimberly bought her 2004 for $24,000, “I used my HELOC so no financing but in a way, I’m still paying for the car as I’ve rolled that HELOC into my mortgage and am still paying on it at 3.75% interest! If I had to do over, I wouldn’t have used my home equity and just gotten a loan for 5 yrs and aggressively paid it off as quickly as possible.”
Kimberly learned her lesson, “If I really thought about it, I should have paid off the car on the HELOC as if it were a regular 5 yr loan but I was thinking that yes, interest is deductible and the payments on the HELOC were so low. Fortunately, we still have equity in the house even adding on the HELOC to the mortgage when we refinanced. Hopefully, someone will think twice before using their home equity for a car.”
Do – know what model and the trim level you want before you get to the dealership. You want to compare the trim level to the trim level for the price. Extras add up and it is the job of a salesperson to make as much money as they can.
Do – factor in your fuel cost as though it were a variable interest rate. No one knows how much fuel will cost in the future, but almost all of us agree energy will get more expensive. If you have a short commute consider an EV or plug-in hybrid so that you can supplement your gasoline costs with electricity.
Don’t – negotiate the price of a new car to include a trade-in. Each part of the transaction should be separate.
Do – sell the car yourself if you can. If not, make sure the dealer pays the rest of the loan off promptly and have it put in writing that the penalties are on them if they don’t pay it off.
Do – use all your resources. If you belong to a credit union check their financing.
Do – If you belong to a warehouse check their specials. The warehouse I belong to, Costco Auto, has specials with pre-arranged prices on many makes and models. They may not be the lowest for a professional haggler, but they require no haggling. And, during special limited-time offers throughout the year, you can take part in their survey to receive a $500 Costco Cash Card. Bonus!
Your estimated monthly payments on a $10,000 loan at 4.75% would be $52 but you would pay $8,779 in interest over the life of the loan. Kimberly is correct that she can write the interest off on her taxes, but the total cost of her car is now $18,779.