5 Practical Finance Tips for Buying Your First Car
Buying your first car is a major step into adulthood. You’ll have to negotiate with the dealer, register the car with your state government and figure out how to pay for everything. Don’t make the experience any harder than it needs to be. Follow these five finance tips for your first car purchase so you can enjoy your new ride.
1. Set a Budget Before Starting Your Shopping
Imagine your first trip to the car lot. You meet a nice salesman who shows you a $20,000 luxury sedan. You’re not ready to spend that much money, so you ask him to show you something more affordable. He shows you a $9,000 Honda. Wow, you might think. That sounds like a reasonable price.
You’d be wrong. The salesman would have manipulated you with a psychological technique called “anchoring.” Because you would see an expensive car first, your brain would view anything cheaper than $20,000 as a good deal, even if you only have $2,000 in your bank account. You can get around this trick by deciding the maximum amount you’re willing to pay for a new car before looking at any of your options.
2. Talk to Your Credit Union
If you’re planning to finance your new car, where will you go for a loan? You certainly don’t want to go through the car dealership’s financing department. They’ll tack on fees and high interest rates. According to the Consumer Financial Protection Bureau, some car dealers receive financial compensation from financing companies for convincing you to accept a loan. This means the dealership won’t have your best interests in mine. Consider opening an account at a local credit union if you can. Because credit unions are non-profit organizations, they aren’t trying to make money from offering you financial services.
3. Get Insurance Quotes
New drivers are often surprised to learn how expensive their auto insurance will be. Insurance companies are legally allowed to discriminate based on age, so young drivers typically have much higher rates than older drivers. It’s not fair, but it’s widely practiced. Your insurance rates will also be higher if you purchase a new car or take out a loan. In fact, if you finance your car, you’ll probably be required to have comprehensive insurance, which can add over $100 per month to your insurance costs.
4. Consider Buying Used
You don’t need a brand-new car, especially if you’re a younger driver. New cars are expensive and depreciate, or lose value, rapidly. You might have heard that a car is an investment. That’s not true. Investments earn value over time. Cars lose their value, and new cars lose large amounts of their resell value very quickly. New cars also come with high insurance rates; according to Bankrate, used cars are always cheaper to insure.
5. Try Buying in Cash
You can avoid a lot of first-time car buyer problems if you buy in cash. First, you’ll have a budget in mind — however much cash you can allocate to purchasing a car. Second, your insurance rates will likely be low because you won’t be able to afford a high-end, expensive-to-insure car. Third, you won’t have to worry about securing a low-interest loan. If you just need a car for basic transportation, it can make sense to start small, pay in cash, and upgrade to a nicer vehicle after a few years.
You’ll remember your first car for the rest of your life. Do you want to remember it with fond memories or frustration over the bad interest rate you got from the dealership, the years you spent paying off a huge loan or the crazy-high insurance bill you had to deal with? For your first purchase, keep things simple. Don’t damage your long-term financial prospects by rushing into things. Do your research, make a plan and enjoy yourself.