Buying a car is (______________________).
How would you fill in the blank? I usually hear one of two responses. Some of my customers say “exciting,” while the rest say “stressful.” Truth be told, it’s a little of both. It can be fun to decide on a make and model — although even that can be overwhelming, with over 250 models available in the U.S. today! It can be nerve-wracking making the actual deal, with the back and forth of offers and counteroffers. It can be intimidating figuring out the financing; after all, buying a car is probably one of the biggest financial decisions you can make next to buying a home.
You might be asking, “How do I make this experience more exciting than stressful?” That answer is simple and straightforward: Do your research first!
Thinking of Buying a Car: Where to Begin
Before you ever go to a dealer, first look at vehicles online and consider what you need and would be happy driving. Take your lifestyle, personality and budget into account. (Bonus tip: Once you’ve picked the type of vehicle you want, call a few dealerships to make sure they either have the model you’re looking for or can get it. Supply chains are still recovering from the pandemic, and many dealerships are running low on inventory.)
Next, decide how you’ll pay for the car. Will you be using cash or financing or a combination of both? Do you have a car to trade in, and have you researched its worth? (Bonus tip: When you call the dealer to check inventory, also ask about price, just to make sure you’re within your budget. Then look up the basic value of the vehicle online. That information will be important in both the negotiating and lending processes.)
Now it’s time to think about the right lending institution and right loan term for your budget. If this part makes you nervous, don’t worry. You can un-complicate the auto loan process by following four simple steps.
Paying for a Car: What to Know
1. Research the basic value of the vehicle.
As I mentioned earlier, this information is important. Here’s why: You never want to pay too much for your vehicle. You can use this information when negotiating the price of your car. Also, your financial institution will look at the loan amount associated with the value (known as the loan-to-value ratio, or LTV) and will only loan within those limits.
You can easily look up vehicle values online. Just make sure the source is reliable and check several websites to get a good comparison.
2. Know all of the costs associated with purchasing a car.
In addition to the base price, you’ll have to pay for taxes and registration. Choose whether you’ll cover these costs yourself up front or if you’ll add them to your loan amount.
Also keep in mind that your vehicle will have to have full insurance coverage for the life of your car loan. You can always check with your insurance company to get a quote of what your insurance costs will be, so you’ll know how to budget accordingly.
3. Decide how long you want the term of your loan to be.
Most financial institutions have many options, typically from three to seven years. Your loan term will impact your monthly payments. Some people choose to go for a shorter term, which means their monthly payments are larger, but they pay the loan off faster. Others opt for a longer term because it makes the cost of their monthly payments more manageable.
My advice is to pick a term that best fits your budget, but keep the term as short as you can afford.
4. Ask your financial institution for the APR (annual percentage rate).
APR on a car loan is the annual cost you’ll pay to finance your vehicle. The lower the APR, the less you’ll pay to finance your car.
It’s important to understand that your credit score will affect the rate. Did you know by federal law you are entitled to one free copy of your credit report every 12 months from each of the three national credit bureaus! Visit the Federal Trade Commission for more information at www.consumer.ftc.gov/articles/free-credit-reports.
Making a Final Decision on a Car: Next Steps
You’ve done your research. The next step is up to you!
If everything lines up well, you may choose to head to a dealer to start the car-buying process immediately. If you review the numbers and feel like you aren’t prepared to buy just yet, that’s OK. It’s wise to wait if you don’t feel financially comfortable enough to make such a big purchase yet. In the meantime, you can start to save, so in the future you can offset some of the financing by making a cash down payment or paying cash for your taxes and registration. Bank of Utah has a number of savings options to help you meet your financial objectives. With features like automatic transfers, you can even set up a schedule where money will move routinely from your checking to your savings account.
Finally, always remember that we’re available to help you gather the information you need to make important financial decisions and give you the tools you need to reach your goals.
(And one last bonus tip: Many of these suggestions and considerations also apply to buying a boat or recreational vehicle, so keep the same advice in mind if a purchase like that is in your future.)
Janell Holden is a payroll administrator for Bank of Utah's human resources team and a former consumer relationship manager for the bank.
