Knowing What’s Right For You Can Help You Get That Much-Anticipated Vehicle While Keeping Your Finances In Check
Questions to start with are:
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Should I buy new, used, or lease a vehicle?
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How much can I afford?
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Should I apply a down payment to the deal?
By weighing the pros and cons of each while analyzing your overall budget, you can be better prepared to make the right choices.
What’s Right For You?
Shopping for a vehicle is exciting, but it can also be complicated. It involves balancing your desires with your financial reality. To make the process more efficient and improve your chances for success, you should consider:
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Your Needs: What are your transportation requirements? Does your vehicle need to be large enough for a family? Will you be hauling work equipment? What is the climate your vehicle will be driving in?
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Your Wants: Your desires are also important when making this purchasing decision. Make, color, style, amenities, and upgrades are all relevant to being happy with your final choice. Be prepared in letting go of a few things you may have wanted, because of…
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Your Budget: It’s easy to get carried away and end up with a vehicle that is out of your price range, and then being responsible for a monthly payment that is beyond your capacity. Your spending plan should dictate your decision - NOT a salesperson’s opinion. Review your overall budget to determine an affordable price range before you start looking.
Save for a Down Payment
While it is possible to purchase a vehicle with no money down, this may not be the best decision. The more money you borrow, the more the vehicle will ultimately cost.
Your down payment plays a key role in determining your loan-to-value ratio, or LTV. Lenders use LTV to assess risk and a down payment may help you qualify for an auto loan more easily - especially if you have a lower credit score. A down payment can keep interest rates lower and the length of your auto loan term shorter, saving you more money in the long run.
New, Used, or Lease: Advantages and Disadvantages
There are pros and cons to each option. Weigh them carefully and honestly.
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Buying a New Vehicle
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Advantages
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You can order the exact make, model, and options that are most important to you.
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The car has value and becomes an asset as the loan is repaid.
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New cars are typically most reliable and are protected by warranties to cover costs of repairs and parts.
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Disadvantages
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New cars can be expensive considering higher purchase prices, requirements for full insurance coverage cost, and registration fees.
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The value of the vehicle starts to depreciate almost immediately.
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Buying a Used Vehicle
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Advantages
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Disadvantages
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A used vehicle rarely has a warranty unless purchased separately.
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Older vehicles tend to have a higher cost for maintenance as repairs are needed over time.
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A used vehicle’s history is usually unknown. It may have been insufficiently maintained and therefore less reliable.
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Leasing a Vehicle
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Advantages
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The monthly payments are typically lower than buying.
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Leases are relatively short-term agreements allowing you to drive a new vehicle every few years.
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Leased cars can offer comprehensive warranties.
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The required up-front cost can be lower allowing you to drive a more luxurious model.
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Disadvantages
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The vehicle does not belong to you and is not an asset.
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It can be very difficult and expensive to get out of a lease contract.
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The cost of insurance can be very high as it requires full coverage.
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Good credit is generally required.
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There will be mileage limitations. You must pay fees for mileage overages.
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In most situations abnormal wear and tear may result in additional costs having to be paid out of pocket. The lease contract will outline what is considered to be outside of wear and tear.
Financing
There are many factors at play when it comes to financing your new vehicle. For instance, your credit history will have a substantial impact on the interest rate you will be offered. The better your credit score, the better the rate you will qualify for. The age and value of the vehicle plays a large role in determining the interest rate and the amount of the loan request. The older the vehicle is the higher the interest rate will be, and the lender must determine if the amount requested for the loan is comparable to the value of the vehicle being purchased. This is referred to as the LTV or Loan to Value factor. A lender will typically keep the LTV factor near or less than 100%. Meaning the amount borrowed should not exceed 100% of the current value of the vehicle. Lastly, affordability is one of the most important factors to any finance process.
Your current debts, assets, and income will be evaluated to determine if the loan request is affordable to you. If the amount requested is outside your means the lender may request a co-borrower that can provide additional income to support the payback of the loan. Make sure you understand the exact price you’re paying for the vehicle, the amount you’re financing, the finance charge, the Annual Percentage Rate (APR), the amount and occurrence of your payments, and the total sales price.
When shopping for the best deal, don’t be fooled by the advertisement of low monthly payments. If the length of the loan and the interest is high, you will likely be paying more than you have to. Beware of 0% financing as well. It sounds like a bargain but these deals often come with inflated prices and fees.
At an auto dealership, you might be encouraged to use dealer financing options. In most cases, a loan from your financial institution is preferable and more affordable. One of the best ways to be prepared when working with an auto dealer is to obtain pre-approval from your financial institution. This way you have already set your spending limit and you know how much your payments will be. You may be able to utilize your pre-approval to negotiate a better deal.
It might help to utilize a loan calculator to see how the sales prices, tax, and interest rates will change the overall cost to purchase a vehicle.
Live Smarter
For more information like this, you can visit the Balance Pro Financial Fitness page in the “Drive Away Happy” section. You can also give us a call at 315-735-8571 to talk about your pre-approval options or make an appointment with one of our friendly Member Service Representatives today.
Bring This Session to a Live Setting
If you would like to schedule our Community Educator for a seminar or workshop for any Financial Friday educational topic, please email your request to FinancialEducation@fsource.org
Interested in learning more? There are also additional resources which have been created specifically to help you best control and leverage your finances. Feel free to use these anytime!