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Your Guide to Savvy Car-Shopping

When you set your sights on buying a new car, a whirlwind of emotions can arise. On the one hand, you’re excited to find and cruise away in your new ride. But on the other hand, you know it’s a big decision that could significantly impact your finances for several years.

That’s why it’s crucial to do a bit of homework before you ever step foot onto a dealer lot. A little prep can help to reduce the price of the vehicle, secure better financing options, and put you into a better financial position overall.

In this article, we’ll highlight some savvy moves you can employ to create a better car-buying experience for yourself and your wallet.

Trading In Your Old Car
One of the smartest ways to offset the cost of your new car is to trade in your old one. Depending on the make, model, year, and condition of your current vehicle, you could significantly reduce the price of your new car and the cost of financing.

Knowing the value of your trade before you head to the dealership will prevent you from being lowballed and give you negotiating power. Follow these tips to ensure you receive a fair and honest value for your trade:

  • Start Online: You can use online tools such as the Credit Union’s JD Power valuation system.   You may also use Kelley Blue Book or Edmunds to get an estimate of your vehicle’s value. These services will give you a general ballpark range depending on the information you input. It’s an excellent starting point.
  • Obtain Multiple Appraisals: Visit a few local dealerships and request an appraisal of your car. Their staff will look over your vehicle and provide a written estimate of your car’s worth. These documents are one of the easiest ways to ensure you receive the most for your trade.
  • Don’t Mention Your Trade: One of the first questions salespeople will ask is whether you have a vehicle to trade. The reason they do this is because they want to lump the trade into the new car price and pad the numbers in their favor. Instead, don’t mention your trade until after you’ve found your new car and agreed on the pricing.

Making a Larger Down Payment
The amount you can put down on your next car significantly affects your monthly payments and the total interest paid over the life of the loan. While your trade-in will partly serve as a down payment, consider paying extra, if possible, to reduce financing costs even more.

  • Lower Monthly Payments: The higher the down payment you can afford, the lower your monthly payments will become. Lower payments will put less of a dent in your finances and make your budget much more manageable going forward.
  • Lower Interest Costs: Every dollar you can put down results in less interest you’ll have to pay over the life of the loan. By reducing the amount that you need to borrow, you instantly save money in terms of interest costs. 

Understanding Different Loan Terms
The length of time that you finance your new vehicle will significantly impact your monthly payment amount. For example, shorter terms will increase your monthly payments, but you’ll pay less interest over the life of the loan. Longer terms will lower your payments but will increase your borrowing costs.

  • Optimal Term Length: A common rule of thumb is to finance a vehicle between 36 and 48 months (3 to 4 years). This rule still stands when looking at pre-owned vehicles. However, it’s becoming more challenging to stick to these terms for new cars as prices continue to climb.
  • Maximum Recommended Term: If a shorter loan term isn’t feasible for you, consider a loan term between 60 and 72 months (5 to 6 years) at most. Many dealers will try to push 84-month terms because it provides the lowest monthly payments possible. However, extending the term this far will lead to significant interest costs and possibly result in you becoming upside down on the loan (meaning you owe more than the car is worth).

Securing a Low Interest Rate
The interest rate you receive on your loan directly impacts your monthly payment and the total amount of interest paid over the life of the loan. The lower the interest rate you can secure, the more you can save on your monthly payment and overall cost of the loan.

  • Boost Your Credit: Lenders generally use your credit score to help price your loan. The higher your credit score, the lower your interest rate will be. Lower scores lead to higher borrowing costs due to increased risk for the lender.

In the months leading up to buying a car, work to better your credit score. Even modest improvements can bring you up to a lower-cost tier, saving you money. One of the quickest ways to boost your score is to pay down existing credit card debt.

  • Comparison Shop: Not all lenders are the same. For example, the Credit Union is a not-for-profit institution, meaning members’ loan rates are usually some of the lowest around. If you wait to obtain financing at the dealer, you will probably end up paying more because dealerships typically recommend lenders that provide them with kickbacks or incentives (and you get a higher loan rate).  

Opting for a Pre-Owned Car
While buying a brand-new car is certainly tempting, purchasing a used vehicle offers substantial benefits without sacrificing quality.

  • Avoid Rapid Depreciation: New vehicles depreciate extremely quickly, losing a significant portion of their value within the first few years. The change in value due to depreciation can amount to thousands of dollars in the first year alone. While you might love that new car smell, you can save substantially by buying a vehicle that’s “new to you.”
  • Enjoy Greater Affordability: Buying used is much more affordable than buying new. Even buying a car that’s only a year or two old can offer you significant savings compared to buying the same model brand new. Opting for a slightly used car will keep your budget in check, plus you’ll still enjoy modern features and reliability.

Obtaining a Pre-Approval
Becoming pre-approved means you apply for your loan with the Credit Union before visiting a dealership. A Loan Specialist will review your finances with you one-on-one and help determine how much you can afford to borrow. Then, you’ll receive a pre-approval letter or check that states how much you’re approved to borrow.
Your pre-approval provides significant financial benefits that shouldn’t be overlooked!

  • Streamlined Buying Process: With your pre-approval, you’ll know exactly how much you can afford to spend on your new vehicle. This feature allows you to go into the car-buying process with clear expectations and can avoid the temptation of overspending or racking up pricey add-ons at the dealership.
  • Enhanced Negotiating Power: With your pre-approval, you instantly have the upper hand when it comes to dealer negotiations. Because dealers know they cannot sell you a car for more than your pre-approved amount, they will often make concessions to close the deal. Plus, you’ll be protected from costly add-ons and avoid dealer pricing games.
  • Autodraft!  If you have a good well established credit history, LMFCU will be able to provide you with an Autodraft.  Autodraft if a pre-approved loan check payable to you and “Blank”, where you will in the dealer’s name to complete the purchase. Autodraft lists a not-to-exceed loan amount and is valid for 60 days from the date of issue. The dealer will help you fill in the autodraft with the loan amount and vehicle information. You endorse the Autodraft and give it to the dealer along with any down payment funds owed. The dealer is obligated to send a copy of the completed Autodraft and the bill of sale to the Credit Union. Upon receipt the Credit Union contacts you to work out the final loan details including repayment and the first payment due date. You then e-sign your final Credit Union loan documents confirming your loan repayment and you are all set!

NOTE: If you’re pre-approved for a new vehicle and the dealership tries to convince you to finance elsewhere, that’s a clear sign they are probably trying to sell you a higher-priced car than you can afford.

Check Out the lmfcu.org Auto Loan Center

  • Check out our library of additional Auto Buying Tips
  • Use our Auto Buying Center to find your next new or pre-owned vehicle from the online listing of more than 4 million vehicles. Features include a quick “find it” tool, extensive listing of features, vehicle photos, “side-by-side” comparisons, trade-in and used retails values, a “Price Advisor” tool, free Carfax reports, and much more!!

We’re Here to Help!
Embarking on your new car journey is exciting. But remember, it’s also a significant financial decision. With a little bit of research and effort beforehand, you can secure affordable financing and avoid costly car-buying mishaps.

If you want to learn more about our auto loans or to get pre-approved for your next car, we’re ready to help. Please stop by our office or call 800-410-0501 to speak with a Loan Specialist today.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.