5 Things to Do Before You Buy a New Car

If your credit is reasonable, then buying a new car is easy. In fact, the process is designed to be simple and quick. This is because the companies underwriting these loans know that a large number of people don’t do their financial homework before they buy. Instead, they go out and look at a few cars, usually on the same lot, and make a relatively quick decision on what they want. That puts your money in their pockets.

The salesperson you talk to on any car lot usually knows if you’re going to buy or not when you walk in. They do this for a living. They also know that they’re likely getting a commission on the sale, on the loan if you finance through the dealership, and monthly or yearly performance bonus as well. Of course, they don’t need to make all three commissions, but that won’t stop them from trying. Therefore, to save, you need to be prepared, and do your financial homework. These five tips will help you do that, and save thousands on a new or used car.

1. Check your credit rating before you even walk through the doors of an car dealership. Poor or underperforming credit can hurt you. For example, if you buy a £10,000 car at a 7.5% APR, and pay just £300 a month, when you’ve paid it all off, you’ll pay about £1,250 in interest over the life of your loan. However, if you’ve got less than great credit, this rate is more likely to be about 15%, meaning you’ll pay £3,000 in interest. For those will poor credit, the rate can jump to the UK maximum of 27.9%, which means you’ll pay almost £9,500 in interest over the life of your car loan. That’s basically double the price.

By checking your credit report, and doing six months to a year of clean up before you purchase a new car, you could easily save £2,000 or more in interest fees just by having a better credit report. For tips on how to do this, visit our piece on cleaning up your credit report (internal link).

2. Calculate the total cost of ownership. This means you need to consider any added dealer costs or loan closing costs, yearly taxes and title fees, and maintenance costs. You’ll also need to check the costs of your insurance. For instance, the average yearly car policy in the UK is about £600. Tack on the cost of yearly maintenance, government fees, plus petrol, and you’ll be looking at a yearly UK average of almost £3,500 total. This makes the UK one of the most expensive places in the world to run an car, and is something you’ll want to factor into your total cost of ownership, budgeting accordingly.

3. Consider what you can realistically afford. Remember that sound financial management is based on a stable savings and fiscal responsibility. The cornerstone of this is being prepared, and not overextending yourself. If you purchase more of an car than you can afford, you’re going to be losing thousands of quid in interest and maintenance costs you just don’t need. Calculate your yearly total, and then stick to the figure you come up with for your purchase price – making sure to include the interest fees in it. Always tell the dealer you’re willing to spend less than you actually can. That way you won’t feel bad if you do buy something extra you really shouldn’t have.

4. Research the car you’re going to be purchasing. Rather than just walking into a dealership and letting your heart and a savvy salesman decide what kind of car you’re going to purchase, do some homework first. Find out the resale value of the car you’d like to buy. See what others have said about them, and whether the one you want is worth what you’re about to pay, or overpriced. Don’t be sold on upgrades either, such as sound systems or other manufacturer-supplied add-ons. They are almost always inferior to aftermarket upgrades, and always overpriced.

5. Negotiate financing before you go into the dealership. When you show up at a dealership with soft offers from banks or other lending institutions, experienced salesmen will leave out much of the fluff you’d otherwise be expected to listen to. That doesn’t mean they won’t still try to sell you useless things like undercoating. Instead, let them know exactly what you want, and what you’re prepared to pay. Also, get their offer in writing, with a guarantee period. This way you can shop around several dealerships. Just make sure the dealerships are not all owned by the same company. That way you can play their pricing strategies against one another, and walk away with the best deal for you, not the dealerships.

Sound financial management is something that should extend to every part of your life. Even if you aren’t always putting everything you save into a pension, you can still live a much better quality of life than you otherwise would. Saving just £100 a month on your car loan will let you take an extra vacation every year, or buy a new iPhone, laptop, or other item you might have had your eye on. Of course, investing those funds is a better way to grow your wealth, but wealth management is a topic for another article.