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Cars

In today’s world you need a car to get to work, school or just about anywhere else. To someone new to credit or finances, sometimes buying a car for the first time is the first exposure they get to how credit works. There are a lot of steps involved to buying and owning a car and nearly every step involves money.

If I had asked people what they wanted, they would have said faster horses.Henry Ford
A used car lot.

How to Buy a Car

There is nothing like getting behind the wheel of a brand new or used car and smelling that new car smell. It’s an exhilarating process to find the right car and get a great deal. If you’ve just turned 18 or even in your mid-20s, there is a good chance this is your first time buying a car. You’ll want to read up and make sure you know everything you’re supposed to do.

 

If you go in blindly you could end up paying for it in the end. Your car purchase can turn into an absolute nightmare if you got the wrong model or make a mistake with financing. These auto dealers are not out there to help you – they want to make money. If you’re not focused during the car buying process you could lose out on thousands.

Steps to Buying a New Car

  • Set a Budget – If you haven’t created a budget or you don’t know how much you can afford, this is the first step in any major financial decision.
  • Pick a Car Based on Need – This is the step that many get burned on. They want that fast sports car or the latest SUV but what they don’t realize is that those cars also come with hefty repair bills or even higher gas costs. You’ll want a car that fits you or your family’s lifestyle.
  • Research Cars – If you know the type of car you want or need then you’ll want to research all of the major brands. Look for brands that have good reports, safety ratings and awards. You should be planning to have this car at least 3-5 years.
  • Test-Drive Cars – Before you test drive any cars you will want to make sure you have at least 3 different ones to test out. The best time to test drive a car is during the week when dealerships are slow.
  • Decide on a Car – If you’ve picked out the car you want and test drove it and it fits what you need, congratulations! This is the first major hurdle you need to get over.
  • Find the Right Price – Before you talk to a salesman you will want to research the car as much as you can. You’ll want to research items like: manufactured cost, incentives or special financing. By knowing what incentives you can take advantage of and the cost of the car you’re looking to buy, it puts you in a better spot for negotiations.
  • Get Dealer Quotes – You should shop around and find a few dealers selling your car and see what each dealer will offer you. There is a very high chance these dealers are selling for well above market price (they do need to make money after all). Keep in mind all of the following:
    • Do not base your purchase or tell the dealer how much you can afford each month (they will tailor the price to your monthly payment).
    • Try to be as unpredictable as possible and do not let the salesman think you’re hooked into buying that day.
    • Review all of the fees and charges they are putting onto you as there are many dealers will put in bogus fees just to recoup more money from you and they “stuff it in the loan” so you never see it.
    • Don’t ever be afraid to walk and that is your best tool in negotiation. If the deal doesn’t sound good or you don’t feel comfortable making it at that time then leave. The salesman will do whatever they can to keep you there until you’re pressured into purchasing, it’s their job.
  • Maximize a Trade-In – If you have a car you can trade in to help lower the overall cost you should consider it if it makes sense. If you owe money on the car or it is in really bad shape you should probably avoid doing so as it could hurt your current loan, if you’re getting one.
  • Finalize a Down Payment – If you don’t have enough to pay off at least 20% of the car you should expect the dealer to ask for a down payment. This is so the bank can turn a profit if you fail to pay your loan. The goal is to have at least 20% of the car paid off but most dealers will let you walk with only 10% but you’ll be paying more in fees and interest in the long run.
  • Get Auto Insurance – Before you can drive off the lot you will have to have auto insurance. You should expect to have at least $1,000 put away to cover this cost on top of what you’re using to get the car.
  • Sign the Car Note – If you’ve found the car you like, the price was right and you’ve setup insurance and put in your down payment the only thing left is for you to sign the car note! Take time to review the contract and make sure everything is correct before signing it.

Steps to Buying a Used Car

  • Set a Budget – Most people tend to buy used cars in cash as they are often much cheaper than a new car, however, some still take out loans to buy them so you should make sure your budget is created and you know how much you can spend.
  • Pick a Car Based on Need – It is a little bit harder to find the exact car you need since you can’t work with a dealer to transport or get a custom one created from factory. You’re pretty much stuck to whatever is out there unless you’re willing to travel.
  • Research the Car(s) – If you know the type of car you want or have found the one you want to buy you’ll want to research. You’ll want to research the current market value, vehicle history reports and more.
  • Test-Drive the Car(s) – Before making any decision to buy a single car you should test drive it. We would suggest test driving a few used cars until you find the one you like.
  • Research the Final Car – Before you talk to a salesman you will want to research the car as much as you can. At this point, if you haven’t, you’ll want to get a vehicle history report and research the fair market price. In some cases it is helpful to bring a mechanic with you that can look at the car (and under it too!) for you.
  • Get a Dealer Quote – The thing to keep in mind is that dealer’s make most of their money off of used inventory. They’ll buy a car from someone for $2,000 under market value and then put it $5,000 above hoping for someone to come in and buy it without doing research. There usually isn’t a lot of room for movement but it definitely helps if you know the fair market price of the car and can use it to negotiate. Don’t be afraid to walk if the dealer’s price isn’t what you want to pay. Keep in mind they do have to make money so they won’t get you all the way down to the market price but you can usually shave off a thousand or two if you’re unpredictable.
  • Maximize a Trade-In – If you have a car you can trade in to help lower the overall cost you should consider it if it makes sense but keep in mind trading a used car for another used car isn’t always the best move.
  • Finalize a Down Payment – If you’re financing the car then you should expect to put down at least 10%.
  • Get Auto Insurance – Before you can drive off the lot you will have to have auto insurance. You should expect to have at least $1,000 put away to cover this cost on top of what you’re using to get the car.
  • Sign the Car Note – Take time to review the contract and make sure everything is correct before signing it as dealers like to slide in extras into the deal before you sign for used cars to improve their margins.

Car Leasing: How to Lease a Car

A car lease is a loan that is designed to let you drive a new vehicle without paying a large sum of cash or taking out a conventional auto loan. You’ll most likely need to put down a down payment, especially if your credit is bad, followed by making monthly payments until your term limits are up (typically 24-36 months).

Leasing vs Buying

It is estimated that around 30% of all cars that leave a dealership’s lot are leases. A car lease is a very popular way to get into a new car with low monthly payments compared to financing.

 

The key difference between buying and leasing a car is that when you lease you’re paying the depreciation value of the car and you don’t actually own the car. A leased car typically comes with several advantages around maintenance and repair, low mileage discounts and lower monthly payments. If you are someone who likes to trade in their car every 3-5 years then leasing may be the right call for you.

 

If you finance a car you’re paying off the entire value of the car over your loan terms and by the end of it you will fully own the car to do as you wish. A financed car typically has a higher monthly payment than a leased car and the moment you leave the lot you lose a large percentage of value (30-40%) the moment it drives off. If you were to sell it back to the dealer or privately you wouldn’t make enough back to cover your loan.

Steps to Lease a Car

The steps to leasing a car are almost identical to that of buying a car. The main difference here is that you’re not applying for financing to own the car. You’ll still want to follow the same steps below to ensure you’re getting the best deal.

  • Set a Budget – Figure out how much you can afford to pay per month and make sure it won’t impact other expenses.
  • Pick a Car Type – A lease tends to be lower or restricted on mileage so its safe to say you’ll be driving mostly local. You’ll want to pick the right car that matches your family’s lifestyle.
  • Research Cars – If you know the type of car you want or need then you’ll want to research all of the major brands. Look for brands that have good reports, safety ratings and awards. You should be planning to have this car at least 2 years.
  • Test-Drive Cars – Make sure you test drive all of the cars you want to before picking the final car. The best time to test drive a car is during the week when dealerships are slow.
  • Shop Prices – Before you talk to a salesman you’ll want to review any of the current incentives or lease deals manufacturers are giving and you should shop around at multiple dealers to get quotes and see inventory.
  • Get Dealer Quotes – You should have quotes from multiple dealers if you’re leasing a car. There is no reason not to have them and you can leverage one over the other to get the best deal.
  • Negotiate Car Price – Do not tell the dealer how much you’re willing to pay each month. Instead ask them for the total price of the car as that is what your payment will be based on. Many dealers will throw a lower monthly payment at you but then require a larger sum down to get there.
  • Finalize a Down Payment – In a best case scenario you should be putting $0 down on a car lease. In some cases you’ll be expected to put $1,000 down depending on your credit and the car.
  • Get Auto Insurance – Before you can drive off the lot you will have to have auto insurance. You should expect to have at least $1,000 put away to cover this cost on top of what you’re using to get the car.
  • Finish the Paperwork – finalize the paperwork and sign the lease and enjoy your new car!

What credit score is needed to lease a car?

You can get a car lease with a credit score as low as 620 but the optimal credit score to have is at least 680. The exact score will vary depending on the dealer you go through as they each have their own financing and agreements with lenders. If you’re on the hunt to lease a car you should try and be well above the 700 credit score range for the best approval chances and interest rates.

Can you lease a car with bad credit?

Yes, you can lease a car with bad credit. A credit score of 680 or higher is suggested, however, having a bad credit score will not stop you from getting a lease if you find the right dealer and lender. You should expect quite a bit of difficulty finding a dealer that will work with you.

 

If you have bad credit and want to get a lease you should expect to put more money down upfront or find a cosigner. If you are approved you will likely face a much higher interest rate and a larger down payment than someone with good or even fair credit.

 

Per Experian, the average credit score for a signed lease was 725. That doesn’t mean there are no options for you and a lease can be a great way to break out of a bad or underwater loan.

Is there a way to improve chances of lease approval?

There are four ways you can improve your approval chances to get a lease:

  • Improve Your Credit Score
  • Find a Cosigner
  • Put More Money Down
  • Lower You Debt-to-Income Ratio

Keep in mind these are not set in stone strategies and do not guarantee approval at any dealership. The key to landing a car lease, especially if your finances aren’t the best, is to improve them and do whatever it takes to do so. If that means putting off buying or leasing a car for another month to pay off a debt or two – you should.

 

It will be very hard to find a cosigner unless it is a family member. If you’re using a cosigner for your loan or lease keep in mind all of the financial obligation falls on them and you’re basically just paying their bill for them. If you don’t pay for the lease then it will fall on them to start paying and their financials will start to take a hit.

 

A lower debt-to-income ratio is preferred by lenders for any major financial purchase and even for credit cards. You’ll want to keep your debt to being at 30% or less of your monthly income for the best results.

Alternatives to Leasing

If a lease is out of the question or you’re not set on leasing a car just yet there are alternatives to it but not many. You can either opt to take over someone else’s lease, buy a used car or talk to a dealership about special financing to help you get into a car.

 

If you take over someone else’s lease this is called a “lease swap” or “lease transfer”. You’re essentially making yourself responsible for the remaining payments and fulfilling their lease terms. There are several sites out there you can shop for these types of transactions like SwapALease or LeaseTrader. The thing to keep in mind with this is that you still have to apply for the lease so the lender may change the terms if they feel obligated to do so.

How Much Should a Car Down Payment Be?

You should put down 20% of the car’s value as a down payment for the best interest rates, approval odds and monthly payment. If you can’t afford to put 20% down you should still push for a goal of at least 10%. However, the true answer to this question varies depending on your financial situation and the type of financing or purchase you’re making.

 

If you’re purchasing a new car or used car you should try and put down as much money as you can without hurting yourself financially. The goal is to hit the 20% target but you should really try to put down at least 10%. If you have bad credit you can almost expect to pay at least 10% as a down payment.

 

If you’re leasing a car you should put down $0 or as little as you can since you won’t see the return on your investment when you turn in the car. If you plan to buy the car after leasing then your down payment will matter and you should put down as much as you can to lower your payment in the short-term.

Should you make a down payment on a car?

In short, yes you should put a down payment on a car as it will lower your monthly payment and lower how much you will pay in interest over the life of the loan.

 

A thing to note is that a car down payment can be used to secure a car loan or a car lease. It is one of the defining factors that make lenders feel more comfortable with giving you the money.

 

Aside from the above, a few other reasons why you should consider making a down payment:

  • You will pay less interest.
  • It will improve your approval chances.
  • It will lower your monthly payment.
  • It might help you qualify for special programs and incentives (like a manufacturer matching a down payment).
  • It can help offset depreciation in the event you need to sell the car abruptly.

How Does Trading In a Car Work?

If you’re looking to buy or lease a car and you want to get rid of your old car then trading it in might be the best option for you, especially if you have equity in the car. In some cases, a trade-in can offset some of the down payment you may need to make.

 

Essentially when you trade in your car a dealer will buy it from you for cash and apply that cash to the sale of a new, used or leased car. A dealer will most likely try to low ball you an offer so they can make as much money on the car as possible when they flip it.

 

It’s important to understand the trade-in process, pros and cons of trading a car in, and even understanding how to trade-in a car with bad credit if you don’t have the best credit situation.

How to Trade In Your Car

The trade-in process is rather simple and can take as little as 10-15 minutes before you can an instant offer from a dealer. Before you decide on a dealer to work with you should take your car to multiple dealers and get a few quotes as most dealerships will offer more or less than your first one.

 

Before you step into the ring with dealers you’ll want to do your research and make sure you’re prepared for the process.

 

The trade-in process will work as follows:

  • Find the fair market value for your vehicle (blue book value).
  • Figure out how much you owe on the vehicle (if you do).
  • Fix any damages, clean the car, etc.
  • Take the car to at least 2-3 dealers and get a trade-in offer.
  • Negotiate the trade-in offer.
  • Finalize the deal.

If you’re trading in your car while buying or leasing a new one you will still want to follow the above steps.

Pros and Cons of Trading in a Vehicle

Pros of Trading in a Car

  • In many states you only pay taxes on the difference in the price of the new car and used car so you’ll end up paying less taxes.
  • You don’t have to deal with the hassle and long time period of trying to sell your own car.
  • It’s usually a quick and easy process at a dealership once you get rolling.
  • You complete the transaction all at the same time with no hassle of return visits.
  • The dealer takes care of all of the paperwork.

Cons of Trading in a Car

  • You’ll more than likely get less than you desired for your car.
  • If you owe more than the car is worth on your loan (underwater) many dealers will roll that negative equity into the new loan and you’ll be paying for it either way.

Things to do Before Trading in Your Auto

Before you rush to trade in your car or even take it to a dealer for appraisal you’ll want to work through a few things. The more preparation you do beforehand means you could walk away with a much higher offer than if you were to just stop in randomly.

 

A few things you should do before going to a dealer for a trade-in offer:

  • Get all of the paperwork for the car. If you can prove maintenance or service records its a good idea to bring those and provide them. The less a dealer has to fix or replace on your car the more they can offer you.
  • Get a full detail done on your car. A complete car wash and detail usually runs less than $150 bucks but could net you more in return value when you take it to the dealer. At a minimum you’ll want to make sure all of your trash is cleaned out, personal belongings and give it a quick wash.
  • Take care of simple repairs. If you’re selling the car privately this makes more sense but if you have things, like a cracked windshield, it could help you to take care of that cost beforehand but be careful as most dealers get materials and labor at a premium. For example, a broken windshield may cost you $250 to replace but the dealer only $100. In this case you should bite the bullet and not replace the windshield.
  • Take care of any violations. If you have any parking tickets, past due fees or anything else with the car you’ll want to clear those out immediately.

How to Refinance a Car

It’s common for car owners to consider refinancing their vehicle loan, especially if they have a loan with bad terms. These terms can either be an extended repayment period or a high interest rate.

 

If you refinance correctly you can save quite a bit of money in the long run. Not only can you reduce your monthly payments but you can also reduce the interest rate and change the length of the loan.

 

Many auto owners take advantage of refinancing to get their loan away from the dealer provided financing and into the hands of the bank they normally deal with.

Should you refinance your car?

There are several reasons to refinance a car. The idea that you can save money in the long-run is at the top of the list. According to TransUnion, car owners lower their interest rate by an average of 2.4% when they refinance their car. That translates to around $50 per month they reduce their monthly payment by.

 

List of reasons to refinance your car:

  • Lower Interest Rate: You’ll usually get a lower interest rate the 2nd time around as your situation has improved.
  • Decrease Monthly Car Payment: If you lower your interest rate or even put more money down during the refinancing process, you’ll likely see your monthly payment decrease.
  • Shorten the Loan Term: A shorter loan term means you can pay off your car sooner.
  • Incentives: Some places offer incentives to refinance with them or even cash-back offers.
  • Change to Primary Financial Institution: A lot of owners will refinance to take advantage of the above but also to move their business to their local institution (especially if they got dealer financing).

Things to consider before refinancing:

  • Refinancing Requirements: There may be more requirements needed for refinancing from different institutions.
  • Prepayment Penalties: You may have to pay a fee to end your current loan early (most do not charge prepayment penalties).
  • Interest Rates: It may not be the best time (market wise) to refinance since interest rates are higher than normal.
  • Credit Score: If your credit score has increased it may be a good reason to refinance for a better rate.
  • Income: A lower monthly payment can free up monthly cash flow to help pay other bills or save.
  • Remaining Time on Loan: If you’re over half way through your loan there is almost zero reason to refinance unless you’re going to refinance for a shorter term to match your current time remaining.

Pros and Cons of Refinancing a Car Loan

Pros of Car Refinancing:

  • Opportunity to reduce your interest rate.
  • Refinancing can extend the length of the loan lowering your payment even more.
  • Allows you to restructure your budget and potentially clean up debt faster.

Cons of Car Refinancing:

  • Can be costly in the long-run.
  • Can make you pay on the same debt longer than intended or desired.
  • Sometimes a higher interest rate may apply if your situation got worse.

How to Refinance Your Car Loan

The process to refinance a car loan is actually really similar to getting a loan for a new or used car. You will start with a loan application, receive an approval or denial, and get the funds to pay off your old car loan.

 

In many cases refinancing a car loan is much easier than the initial process of getting a new car loan or a used car loan.

 

The steps to refinancing a car are:

  • Review your credit and make sure you’ve improved since you’ve taken out the initial loan.
  • Estimate your car’s loan-to-value ratio as you’ll want to make sure you have some equity in your car before applying.
  • Make sure your don’t have any penalties on your current loan for refinancing or ending early.
  • Before moving forward take a step back and really make sure this is the right decision for you. For example, if you have less than 50% of your loan time remaining that means you’ve paid more in interest than principal for the life of the loan – the bank wins.
  • Make sure you have all of your documentation ready to go. You’ll want your driver’s license, verification information, income information, car and loan information handy.
  • Shop around for the right quote. You shouldn’t go back to refinance from the dealer who gave you the loan and instead find another lender that you can use.
  • Apply for your new loan and pay off your old one.

What is Auto Insurance?

Basic personal auto insurance is mandated by most states and will provide you with some financial protection in the event of an accident.

 

Auto insurance is a contract between you and the insurance company that protects you against financial loss in the event of an accident or theft. In exchange for you paying a premium, the insurance company agrees to pay your losses outlined in your policy.

 

Your auto insurance will cover a few things but you should read your insurance policy to get a good understanding of it. If you need help – you should always speak to an agent.

 

A typical auto insurance plan will cover:

  • Property: such as theft or damage to the car.
  • Liability: your legal responsibility to others.
  • Medical: the cost of treating injuries, lost-wages, or funeral expenses.

Auto insurance coverage is priced individually (a la carte) to let you customize your coverage amounts to suit your exact needs and budget. Basic personal auto insurance is mandated by most U.S states and the laws vary in each state.

 

Your auto policy will cover you and other family members on your policy whether driving your car or someone else’s car. Your policy also provides coverage if someone who is not on your policy is driving your car with your consent.

 

Your personal auto policy only covers personal driving and does not cover commercial work or commercial driving. For example, if you deliver pizza your personal insurance will not cover you if you get in an accident on the job.