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Buying your first car requires a great deal of thought and planning, especially at a time when prices are soaring. CNBC reports that the average cost of a new car was $46,000 in June, while a used car was $28,000. This represents an increase of 20% from 2020 prices.
With the highly competitive market, buyers must strategize before purchasing to avoid paying thousands of dollars over the asking price. Because prices are not expected to come down in the next few months, being in the market for your first car is going to be a challenge.
Here are four things you need to know before buying your first car:
Know your financing options
Before even stepping into the car dealership, spend some time researching the cars available based on your budget and financing options. One option you have is getting a car loan from a bank, finance company, or credit union. Another option is dealership financing, where you and the dealer agree on a payment plan with an additional finance charge. Knowing your options gives you the tools to negotiate appropriately and level the playing field with your dealer.
By having an idea of the options available to you, you make arrangements in advance and make adjustments to your budget. Because finance options vary in terms of finance charges and interest rates, you can set a realistic budget for the payment of your car. Doing this makes your goal more attainable and narrows down your options to the most compatible vehicles.
Decide on an insurance plan
In most states, car insurance is required by law. Car insurance policies offer financial protection as they help pay for covered losses such as damages to the vehicle and medical bills due to accidents. However, insurance plans are not insulated from inflation. Escalating costs for vehicle repairs and medical bills and a sharp increase in car accidents have caused the rise in auto insurance rates. Fortunately, there are pointers you can follow to help you secure a cost-effective vehicle insurance policy. A Sound Dollar guide to saving on insurance recommends determining your individual needs depending on your usage before choosing a plan. You can also consider increasing your deductible, or the amount you pay out-of-pocket, so you can obtain a lower insurance premium. Finally, to save on insurance fees once you finally get your car, take good care of it and practice safe driving to keep your records pristine.
Determine your credit score
Before negotiating on a vehicle, it’s essential to know your credit score. Having a good idea of your credit report and the interest rates available to you can help you negotiate a good deal for your first vehicle. Your credit score determines three things: your eligibility for a car loan, your interest rate, and your monthly payments.
A previous discussion on our 'How Bad Credit Affects Your Life' blog post explains how a negative credit score can make you ineligible for a car loan. Although there is no industry-wide, official minimum credit score to qualify for a loan, the general rule is that the higher your credit score, the better terms you’re likely to get on a loan for your first vehicle. To improve your credit score, review it first and pay your revolving credit as early as possible to lower your credit utilization percentage.
Discuss pricing options with your dealer
Car pricing can differ depending on the amount of downpayment and the length of payments. Car sales professional Scott Hall discourages naming a monthly price and instead emphasizes getting detailed pricing information in advance from different dealerships. He advocates using online services to get invoices and deal pricing to get a range of prices. You can also consider cold-calling various dealerships in your area to have price point comparisons on your preferred vehicles.
Calculating the total cost of the vehicle depending on the payment term can also save you thousands of dollars. Having information from different dealers can help you negotiate prices, give you an upper hand, and avoid information asymmetry.
With the rising costs of vehicles, you can arm yourself with the information you need before making the critical decision of buying your first vehicle. Knowing your options beforehand will help you stay within budget and plan for your long-term expenses.
Written by Nicole Kaur