When many young people endeavor to purchase their first automobile, they face a wide variety of choices. One of the choices available is to lease or buy. If buying, you can purchase the automobile with cash or finance it. It is highly important to make the right decisions when purchasing a car since the wrong move can turn that shiny new street cruiser into an automotive prison that locks up your financial resources for years on end.
Automotive Purchase Points
Most people who are deciding how to purchase a car on paper will reply that it is best to buy with cash. This is certainly true for people who have enough disposable cash to buy their cars outright, but what about people who need to finance?A The first and most important point of consideration is to make certain that you are not buying more car than you can afford. One rule that many people support is called the 20/4/10 rule. Namely that if you are financing a car, put 20% down, finance it for 4 years or less, and make sure the payments do not exceed 10% of your income. This will ensure that you have positive equity when you drive the car off the lot, which can prove very important if the car is wrecked or stolen.
Leasing a car sounds great at the beginning, but you rarely get a good deal on the price and there are typically fees and charges that are due when your lease matures. If you do not have the cash to ‘buy out’ the lease at its expiration, the nice people at the dealership will be happy to ‘bury’ the charges you owe into a new lease. A lease can be good if you don’t want to deal with automotive maintenance and are willing to pay a higher overall price.
Dealer Financing Trap:
- Many dealers attract buyers with 100% financing, zero percent interest, easy qualifying, or some other gimmick. All of this sounds great and induces many people to buy cars at or near the full retail price. (When you are being financed by the dealer, you have very little power to negotiate a lower price) However, if something happens to the car, your insurance will reimburse based on market value, which will most likely be less than your car is worth. Now you have a bill that is due for the remainder between the price you paid and the car’s value when it was wrecked or stolen and that beautiful financing has suddenly evaporated.
Friends and Relatives Trap:
- This one almost goes without saying, but great danger can lurk when you purchase an automobile from friends or family. Before engaging in this sort of transaction, make sure to have the car checked by a competent mechanic or mentally prepare yourself to potentially absorb some unexpected expenses without complaining.
Optimimal Automotive Financing
The optimal situation for a person who must finance is to arrange for their financing ahead of time. This allows them to walk into a dealership knowing exactly how much car they can afford to buy, exactly what the rate will be, and exactly what the payments will end up at for a given price level. This allows you to negotiate the ‘price’ instead of the ‘payment’ with the sales representative. If the best deal they can offer isn’t to your liking, you have the power to walk out and go somewhere else because your financing is not captive to one particular dealer. Even if the rate you get from the bank is higher than the one offered by the dealer, you will have the ability to negotiate down the price and reduce your risk of loss if the car is damaged or stolen.
In the end, it is highly important to avoid turning our car into an automotive prison.