Car Buying For Beginners Kiplinger


In the year 2021, a global shortage of microchips triggered supply shocks affecting a wide range of products, from smartphones to home appliances. But no industry has been hit more than the auto industry: in August 2021, for example, reduced inventory at Ford dealerships resulted in a 33% drop in sales in the United States from the previous year. .

With increased demand amid shortages, many car buyers are paying top dollar for their new or used vehicle, and sometimes for the car loan as well. If you’re looking to buy and finance a car before supplies return to normal, do some comparisons to make sure you’re not overpaying for your vehicle or the loan.

Stick to a budget. “Buying a car is emotional,” says Matt Degen, editor of the Kelley Blue Book automotive website. Many first-time buyers are eager to opt for flashy designs or stylish features, at prices that may not match their budget.

You will save money buying a used car, although loan rates are a bit higher for used vehicles. Recently, rates were on average 4.2% for a four-year new car loan and 4.8% for a four-year used car loan, according to Bankrate.com.

However, when you buy a used car, you run the risk of the vehicle needing major repairs or having maintenance issues. For added peace of mind, Degen encourages buyers to consider Certified Pre-Owned Vehicles (CPOs), which come with a manufacturer’s warranty.

If you are choosing a new car, decide whether you want to buy or lease the vehicle. Buying is smart if you plan to hold the car until the loan is paid off and beyond (or if you plan on paying in cash). Leasing often makes sense if you tend to trade in a car before you’ve paid off the loan. With a lease, you mainly pay the depreciation of the car over the term of the lease (usually three years). Monthly payments are generally lower than a car loan, and repairs (but not maintenance) are covered for as long as the warranty lasts. Make sure you negotiate as hard for the price of a rental car (called capitalized cost in rental jargon) as you do for a purchase.

Even if the loan or lease payments are within your budget, make sure you understand the overall amount of interest you are paying and for how long. The dealer’s finance and insurance office may extend a loan or manipulate a lease to lower your monthly payments, but it may not be the best for your overall financial outlook.

Plan for costs beyond monthly payments, such as repairs, maintenance, fuel, and insurance. You can find a 5 year cost of ownership tool at www.kbb.com that estimates these costs, depreciation and more.

Dealer or bank? One of the main decisions car buyers make is obtaining financing from the dealership or from a bank or credit union.

Borrowing through the dealer allows you to take advantage of all of the manufacturer’s incentives, such as low or no interest financing or cash back offers. Particularly at the end of the model year, automakers sometimes sweeten the deal with incentives on less popular vehicles. But Degen warns that you may not be eligible for the same deal a friend got on the same car. And manufacturers haven’t needed any incentives lately to remove cars from their lots.

Major used car dealers, such as CarMax and Carvana, also offer loans. CarMax, for example, aggregates several sources of funding on its website so that buyers can compare offers. Carvana includes a tool on their website that allows you to pre-qualify for a loan so that you can explore various vehicle financing options.

You may get a better deal on a loan from your bank or credit union. And borrowing from your bank or credit union can take the pressure off of buying and financing a car all in one place.

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