It happens to all of us sooner or later: The semi-reliable junker we’ve been driving since high school or college finally breaks in a way it can’t come back from. And now, you find yourself buying a car for the first time. Here’s what you need to know about buying a car for the first time.
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The Short-Term Mistakes
The biggest mistake is one often made even by ostensibly experienced car buyers, and it’s confusing car financing with buying a car. Instead, your car loan and your car are two intertwined products, and you pay for your car financing in a variety of ways. Knowing that will help you avoid a serious financial mistake.
Car loans break down into three different pieces. There’s the principal, or what you borrow; the interest, or what you pay back on top of the principal, and the term, or how long you’ll be paying back the loan, generally written down in months. For example, on a car loan with a two-year term, your term would be written as twenty-four months.
The best way to finance your car is to borrow as little as possible at the lowest possible interest and the shortest possible period. It’s important to remember, as well, that there are any number of lenders beyond the dealership and your local banks. You should carefully examine alternative lenders, especially if you don’t have much of a credit history. They can often save you money on your car loan.
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The Long-Term Mistakes
It’s often tempting to take a longer loan, as it reduces your monthly payment. And realistically, if you need to fit your car payment into a tight budget, you might have to opt for this. But before you do that, you need to do your homework to ensure it makes long-term financial sense.
It’s easy to forget as you’re shopping that when your car loan is paid off, that means you own a car. Your car, when it’s fully paid, will be an asset of some value, but that value drops over time, called depreciation. The longer your car loan takes to pay off, the lower the value of the car you own at the end of it.
In fact, it’s very easy for car owners to go “upside-down” on their loan, which means they pay more than the car is worth in interest and fees by the time your car loan is paid off. That drags on your overall financial outlook, and the less your car is worth, the harder it’ll be to buy your second car.
So, take a moment, and do some research. How much interest are you going to pay for the life of the loan? And how does the car you’re considering depreciate in value over time? While you can’t exactly predict how your car will drop in value, you can get a rough idea of how much it’ll be worth when you’re paid off. If that’s less than the interest, it’s time to consider another car or another loan.
Don’t be intimidated by buying your first car. If you do your research and shop for financing ahead of time, you won’t regret your junker being tired.