Spring is here which means many people are in the market for a new car. Although consumers buy cars year round, many individuals choose to shop when the weather is better and allows for easier shopping. Also, previous model year vehicles are now available at a lower price. But no matter what time of the year you purchase a new car, here are several tips to keep in mind.
- Timing is everything. According to Autotrader.com, buying a car at the end of the month in often leads to better deals with car dealerships. Also, customers who shop on a Monday are often able to secure better deals than those who shop during the weekend. Finally, wait until a model is about to be replaced or discontinued and purchase the old model. If you do decide to purchase a car that is being discontinued, make sure that you do your research and that the car is not being discontinued for maintenance issues.
- You’re usually better off obtaining auto financing from a financial institution, not a car dealer. In addition to (possibly) getting a better loan, separating your auto financing and purchasing providers also makes it clearer to understand the true price of the car. At some point in the conversation, the dealer will ask you how you plan on paying for your car purchase. You are best off telling them that you will be paying in cash. This way, the discussion will be around the purchase price of the car that you want and it will be clearer to determine the true price and value of the car rather than concentrating on the monthly payment number.
- Your monthly car payment shouldn’t be more than 20% of your disposable income. Don’t stretch your budget when buying a car. Set a realistic goal and don’t go over it. Other auto and life expenses will crop up. The last thing you want is to struggle over a monthly car payment. A certified pre-owned car can be a budget-friendly option when buying a “new” car.
- Long-term car loans will cost you lots of interest. Borrow for no more than 3-5 years. The longer you have the loan, the longer it will take you to pay off and the more interest you will incur. The Wall Street Journal uses the following example:
"Say you take out a $20,000 car loan at 5%. If you borrow the money over four years, your monthly payment will be $460.59. At the end of four years, you’ll have paid $2,108.12 in interest.
If you borrow the money over ten years, your monthly payment will only be $211.12, but at the end of 10 years, you’ll have paid $5,455.72 in interest.”
- Don’t take out long-term investments to pay for the car. Don’t spend any of your retirement savings (IRAs, 401(k) s) for a car no matter how bad you want the vehicle. You will incur penalties for withdrawing from tax-sheltered savings and hurt your future retirement plan. Even non-retirement investments can carry penalties, such as capital gains taxes for investments held longer than one year.
- Don’t take out home equity loans to pay for a car. The risks of doing so far outweigh the benefits. You are not only taking on debt, but you are leveraging your house on a depreciating asset (your car). This is not advisable.
No matter when you make your new car purchase, be sure to keep the above tips in mind before you buy.