Buying a new car is exciting, but it is also a big decision that can significantly impact your finances for several years. That’s why it is crucial to do a bit of homework before you ever step foot onto a dealer lot. A little prep can help to reduce the price of the vehicle, secure better financing options, and put you into a better financial position overall. Here are a few steps you can take to improve your car-buying experience so you drive away in a car you love and can afford.

1.    Trade In Your Old Car, If Possible

One of the smartest ways to offset the cost of your new car is to trade in your old one. Depending on the make, model, year, and condition of your current vehicle, you could significantly reduce the price of your new car and the cost of financing.

Knowing the value of your trade before you head to the dealership will give you negotiating power. Follow these tips to ensure you receive a fair and honest value for your trade:

  • Start Online: You can use online tools like Kelley Blue Book, NADA, or Edmunds to get an estimate of your vehicle’s value. These services will give you a general ballpark range depending on the information you input. It’s an excellent starting point.
  • Obtain Multiple Appraisals: Visit a few local dealerships and request an appraisal of your car. Their staff will look over your vehicle and provide a written estimate of your car’s worth. These documents are one of the easiest ways to ensure you receive the most for your trade.

2.    Make a Larger Down Payment on Your Car

The amount you can put down on your next car significantly affects your monthly payments and the total interest paid over the life of the loan. While your trade-in (if you have one) will partly serve as a down payment, consider paying extra, if possible, to reduce financing costs even more.

  • Lower Monthly Payments: A higher down payment often means your monthly payments will be lower. Lower monthly payments can help make your budget much more manageable going forward.
  • Lower Interest Costs: Every dollar you can put down results in less interest you will have to pay over the life of the loan. By reducing the amount that you need to borrow, you instantly save money in terms of interest costs.  

3.    Understand Different Car Loan Terms 

The length of time that you finance your new vehicle will impact your monthly payment amount. For example, shorter terms will increase your monthly payments, but you will pay less interest over the life of the loan. Longer terms will lower your payments but will increase your borrowing costs.

  • Optimal Term Length: A common rule of thumb is to finance a vehicle between 36 and 48 months (3 to 4 years). This rule still stands when looking at pre-owned vehicles. However, it can be more challenging to stick to these terms for new cars as prices continue to climb.
  • Maximum Recommended Term: If a shorter loan term is not currently possible for you, consider a loan term between 60 and 72 months (5 to 6 years) at most. Extending your term longer (like to 84 months) will lead to significant interest costs and possibly result in you becoming upside down on the loan (meaning you owe more than the car is worth). 

4.    Secure the Best Possible Interest Rate

The interest rate you receive on your loan directly impacts your monthly payment and the total amount of interest paid over the life of the loan. The lower the interest rate you can secure, the more you can save on your monthly payment and overall cost of the loan.

  • Boost Your Credit: Lenders generally use your credit score to help price your loan. The higher your credit score, the lower your interest rate will be. Lower scores lead to higher borrowing costs due to increased risk for the lender.

    In the months leading up to buying a car, work to better your credit score. Even modest improvements can bring you up to a lower-cost tier, saving you money. One of the quickest ways to boost your score is to pay down existing credit card debt.
  • Comparison Shop: Not all lenders are the same. For example, a credit union is a not-for-profit institution, meaning members’ loan rates are usually very competitive. 

5.    Choose a Pre-Owned Car

Purchasing a used vehicle may offer substantial benefits without sacrificing quality.

  • Avoid Rapid Depreciation: New vehicles depreciate quickly, losing a significant portion of their value within the first few years. The change in value due to depreciation can amount to thousands of dollars in the first year alone. While you might love that new car smell, you can save substantially by buying a vehicle that’s “new to you.”
  • Enjoy Greater Affordability: Buying used is often more affordable than buying new. Even buying a car that is only a year or two old can offer you significant savings compared to buying the same model brand new. 

6.    Get Pre-Approval

Becoming pre-approved means you apply for your loan with a credit union or bank before visiting a dealership. A loan officer will review your finances and help determine how much you can afford to borrow. Then, you will receive a pre-approval letter or check that states how much you are approved to borrow.

Your pre-approval provides significant financial benefits:

  • Streamlined Buying Process: With your pre-approval, you will know exactly how much you can afford to spend on your new vehicle. This feature allows you to go into the car-buying process with clear expectations.
  • Enhanced Negotiating Power: With pre-approval, you instantly have the upper hand when it comes to dealer negotiations. Because dealers know they cannot sell you a car for more than your pre-approved amount, they will often make concessions to close the deal. 

 

Embarking on a new car journey is exciting, but also a significant financial decision. Credit Union 1 can help you take the next step forward with quick pre-approval. Start an auto loan application today to get on the road to your new car.