After recently purchasing my first car, I have developed a game plan to buying your first car like a pro. I was fortunate enough to have my father, who has years of car purchasing experience, give me a step-by-step plan on getting the exact car I wanted at the price I wanted. It worked out so well for me that I would like to share this game plan with you.
1) Build Up Your Credit
A few weeks after graduating college in spring of 2016, I knew that I wanted to be able to buy my first car by 2018. I asked my parents what I could start doing to be able to get a car loan in the near future. They said I should start building my credit. At the time, I had a credit score of 0, and I never owned a credit card. I decided I would apply to get a credit card with some local banks. I was shocked because I got rejected twice although I had no debt.
Fortunately, there was another path toward getting a credit card. My father was able to co-sign for me to start my line of credit. For the next year, I would only use this credit card to pay for essentials like groceries, bills, and gas. When the monthly credit card payments were due, I would never pay the minimum amount; I always paid the full amount owed. This discipline helped me get a 700+ credit score in less than a year. After establishing that high credit score, I was ready to apply for an auto loan.
2) See How Big of a Loan You Can Get
When you are thinking about purchasing a car, it is essential that you figure out how you are going to finance it. The two most popular options are getting a loan from a bank or getting the financing directly from your auto dealer. I personally recommended going through a bank, because it is secure and you generally have a longer relationship with your bank than with your auto dealer.
Applying for your auto financing is where your credit is going to come into play. The higher your credit score, the more money you are going to be able to request for your loan. Also, you are going to receive better interest rates and longer payment periods. Interest is the amount of money you pay back to the bank on top of the money you borrow from them. This is important because the higher your rate is, the more money you end up spending on your car in the long run. Your payment period is important as well because the longer you have to pay off the loan, the smaller your monthly payments are.
I was quoted the following from my bank as far as interest goes: For a 2016-17 (car year) car, I would get 3.1% interest rate with a max of 6 years of financing. For a 2014-15 car, I would get 3.5% interest rate with a max of 5 years of financing. For a 2012-13 car, I would get 6.5% interest rate with a max of 4 years of financing. For a 2009-11 car, I would get 7.0% interest rate with a max of 3 years of financing.
With this information, I was now ready to create a budget.
3) Create a budget
After you discover how much you get can for a car loan, you need to make a strict budget. There are a ton of extra expenses that people do not take into account when purchasing a car. I am going to break down some of these expenses for you so that you can be prepared.
Cost of the Car, Taxes, Title, and Licensing
You have to pay taxes for purchasing the car. This will cost roughly 10% of the cost of the car. You also have to pay to own the title of the car and licensing for the plates of the car, which will cost roughly $600-$700. After you have put the sum of all of these costs together, this is referred to the “out of the door” price. Knowing that price lets you know the price of the car, tax, title and license of the car.
This is where an extra huge cost can come in. Depending on your age, you can be paying large amounts of money to have your own insurance. Once you turn 25, you will get a decrease in these costs because you are considered to be at a responsible driving age. Also, being married can decrease these costs as well because you are seen as more responsible. If you keep a clean driving record, you should be able to receive lower monthly payments; however, if your driving history has a record expect to have significant higher monthly payments. I highly recommend staying on your parents insurance until you are 25 if you are able; otherwise, prepare to greatly account for your monthly insurance cost which at times can be more than your monthly car payment.
Having all of these numbers mapped out will give you a solid foundation that you can work with before dealing with auto dealers.
4) Look for the car you want to purchase
Now that you have your budget, start looking for the car you want to purchase. I recommend looking in two places: a 25-mile radius of where you currently live and 25-mile radius from your hometown. Leveraging connections from your hometown could help you get better deals (personally speaking, it did for me).
First you need to decide whether you are going to buy a new car or a used car. Personally, I recommend getting a used car with as few miles on it as possible. If you decide to go the used car route, you also need to make sure you take notice of what year the car is, if the car still on warranty or if it has an option for an extended warranty, and how many miles the car has.
Things to Look Out For
The year of the car is important, as you saw earlier in this article, because the interest rate you pay the bank for the car loan generally increases the older the car is. Also, the older the car is going to have a shorter pay back period, which means larger monthly payments.
The less miles your car has, the better in a lot a ways. If your car has less than 30,000 miles, it is usually still on warranty. If the car is still on warranty that means if anything happens to the car, you can take it to the shop and it can be fixed without additional payment. Extended warranties are for cars with warranties that have ended and cover further mileage (usually 80-100k miles). Warranties are important because if you do not have them, if anything happens to your car, that is more money out of your pocket to pay to fix it. Also, keep in mind that the less miles a car has the more expensive it is.
5) Go to dealership to negotiate with a manager, not salesmen
Now that you have identified the car you want to purchase, it is time to go negotiate with the dealer. If you purchase a used car, make sure you go to Kelly Blue Book. It leads you put the information of the car into its’ forms and it lets you know a fair resale value of the car. This is important because it lets you easily know if the dealer is overpricing the car and if the car is greatly underpriced there must be something wrong with the car.
When you go to the dealership, you will have car salesmen flock to you. Do NOT let them engage with you. Instead, ask to speak to their manager. Why you may ask? Salesmen do not have the ultimate say or decision, so they are acting like an intermediary so that they can get the largest commission they possibly can. You can easily walk into a dealership and speak with a salesmen who will try convince you to purchase a completely different car, spend more money than you wanted to spend, try to convince you to not take the bank loan and let them finance the car, and try to convince you that a down payment is a good idea. Do not let this happen to you. My father tried to warn me of this and I almost fell for the trap myself.
A Quick Lesson
The first dealership I ever went to I went inside and was greeted by a salesmen immediately. I asked to speak to his manager and he said he was out of the office for the day (blatant lie). So I decided to ask him to show me the car I was looking for. After 45 wasted minutes, we end up going to manager for him to tell me the car had recently been sent elsewhere. Take my word for it, earnestly insist to only speak with a manager at the dealership or leave and come back until you see one; otherwise, you will most likely be wasting your time or potentially getting setup to be swindled.
I have a few warnings and tips to know about negotiation with car salesmen or dealers. They are going to probe you for as much information that they can, so please remember: 1) You do no need to tell them how much of a loan you have been approved for 2) If they offer to try to finance your car, do not reveal your interest rate. Ask them what’s the best rate they can give and if it is better continue the conversation; otherwise, end that conversation 3)Do not pay a down payment if you have been approved for a loan.
Let me speak to the manager
After you have gotten your meeting the manager, tell them the car you are looking for and the “going out the door” price. Most managers will be impressed that you have done your homework and know exactly what you want and will be willing to work with you. By knowing the final price you want to close at helps you gain leverage with the actual price of the car. Remember, you ultimately have all of the leverage because you can walk away! Do not ever feel pressured in taking a deal that you either know is bad or feel that you are being taken advantage of.
6) Purchase Your Car
You have done the homework, you have sharpened your negotiation skills, and now you have come to an agreed upon price. It’s time to purchase your car! Before you can purchase your car and leave the lot, you have to have car insurance for that car. Make sure you get your insurance work done before you try to go close on your car. After you have your insurance, go to the bank to pick up your check, then go to the dealership to do a final look through for the car, sign some paperwork, give the check, and get the car keys to drive away in your new car!
Buying Your First Car Like a Pro
Do you feel you need to talk through this strategy to make sure you get it right? I can help! Contact me today so that we can discuss how you can purchase the car of your dreams!