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The Smart Student's Guide to Buying a Car

Going through the process of buying a car can be a challenging experience if you don’t do your homework in advance. The more upfront effort you put into finding the right car at the right price, the better deal you will get in the end. Here is some information to help get you started:

  1. Determine your needs. Do you want a car that will last 10 years, or is something to get you through your college years good enough? Do you need a truck for a second job, or do you need a basic car just to get around town? Think through your daily routine to determine what type of car would best serve your needs.
  2. Research your options. Some car models have a history of great performance. Others don't. Go online to websites like Kelley Blue Book or Edmunds to compare costs, read reviews, and get free advice about buying new and used cars. Consider the total cost of ownership , which reflects the car’s price, average insurance rates, and common maintenance in the first few years of owning the car.
  3. Look for incentives and rebates. Dealers are always offering various incentives and rebates to lure customers in. A cash rebate amounts to an immediate reduction of the price of the car, whereas a dealer incentive may include no- interest or low-interest financing. Go online to the specific car manufacturer’s website to learn about special rebate deals it may have specifically for college students and recent grads. Websites like Kelley Blue Book or Edmunds also report on incentives and rebates.
  4. Get quotes. If you're buying from a dealer, shop around. Get quotes from at least three dealers for the car you want (make sure the quotes are for the same model, options, color, and features). It’s possible to get quotes on the vehicle you want by emailing a dealership. If you're buying from a private party, make sure you check the True Market Value from Edmunds or the Blue Book Value from Kelley Blue Book.
  5. Be flexible. Do not fall in love with any vehicle until you have done your research.  When dealing with a seller, project an interested, but nonchalant, attitude about any specific car.  If they sense that you already have made up your mind, negotiations will play to your emotions and you may pay more than you need to. Bring a parent or friend with you to pull you out of an emotion-based negotiation. Don’t be afraid to walk away: there is always another car that will suit your requirements.

Pros

Cons

BUYING NEW

As the sole owner of the car, you'll know its performance and maintenance history from the start. The minute you drive the car off the lot, it is worth less than before you bought it.
If you are financing the purchase, chances are interest rates will be lower than for a used model. Most cars go down in value by 40 percent in their first three years.
The car most likely will come with a manufacturer’s warranty to cover any problems that may occur. The newer the car, the higher the price. New cars typically have higher insurance rates and higher motor vehicle registration fees.

BUYING USED

Buying a used car will cost you less upfront than with a new car.
If you buy a lemon—a car that looks fine but turns out to be a constant problem—you can run up repair bills quickly.
Used cars can be bought through a manufacturer's certified pre-owned program. They’re subject to inspection, making the manufacturer responsible for certain repairs.
Buying a used car from a private party will not include warranties or service programs.
Insurance premiums will be lower than those for a new car.
There are a lot of unknowns in buying used.

Evaluating used cars

When purchasing a used car, avoid buying a “lemon” by getting as much information as possible.

  • Request ownership history. Note the mileage on the odometer and review the maintenance record (if available).
  • Check for body damage. Inspect the car closely for dents, dings, chipped paint, scratches on the body, and obvious repairs.
  • Test drive it carefully. How does the car drive? Do the brakes work well? Does the car pull in any direction? Are there any unusual noises? Pay close attention and make note of any questions you have.
  • Consider having the car inspected by a qualified mechanic. When buying any used vehicle, the best investment you can make is $75 to $150 for an independent mechanical inspection by a qualified mechanic.
  • Request a vehicle history report. Request a vehicle history report from an independent reporting service. A report can be ordered online for a small fee from CARFAX, AutoCheck, or other provider. Using the vehicle identification number (VIN), the company researches the car’s title history to determine if the car has been salvaged, flooded, or rebuilt. It also will report on odometer fraud and major problems in the past.
  • Request a copy of the car's service record. Most used-car dealers can provide this to you. If you're buying from a private party, ask if the owner has kept maintenance records that you can review.
  • Read the fine print. Be sure you know what's covered in the warranty and for how long. The warranty may mean you won't have to pay for specific repairs for the life of the warranty, so reviewing the terms is worth the effort.

Analyzing costs

Your cost is a combination of the negotiated price of the car and your financing agreement (if you don't pay cash).

Vehicle Cost

The best way to make sure you get a good deal is to do your research, be prepared to negotiate, and get quotes from at least three different dealers. In addition, become familiar with these key dealer terms before starting the negotiating process:

  • Invoice price: This is the price the manufacturer charged the dealership for the car. In most cases, any price you negotiate at or near the invoice price is a good deal.
  • Manufacturer's suggested retail price (MSRP): This is the price manufacturers recommend that their dealers charge for a particular car. The MSRP is usually thousands of dollars above the invoice price. Popular models that are in tight supply will sell for close to the MSRP; lower-demand generally can be purchased for less.
  • Market value: When looking at the market value of a car, focus on your particular geographic area and look at the prices people have actually paid for cars in the area.
  • You can find invoice prices, MSRP, and market value at websites like Kelley Blue Book or Edmunds.

Auto Financing

Loaning money is big business. Again, do your research on loan options and get quotes from at least three different lenders. Here are a few details of car loan financing that you need to know:

  • Car loans are available through banks, credit unions, online resources and dealers. Dealers may be able to offer interest rates as low as zero percent as part of a manufacturer’s promotion.
  • An auto loan will be arranged based on the negotiated price of the car and related expenses (sales tax, title, and licensing fees), your credit rating, the amount of your down payment, and the interest rate.
  • Most auto loans have a duration of from three to five years—36 to 60 monthly payments. The longer you take to pay off the loan, the lower the payments will be but the more interest you will pay .
  • While you are paying off the balance you owe on your car, the lending institution holds the car's title, meaning it owns the car. Once all the payments are made, the car's title is sent to you and you become the official owner.

Calculating payments

Using one of the many available online calculators, you can estimate monthly car payments, loans, interest rates, and more. Visit websites like bankrate.com and Edmunds for more information.

(Any reference to a specific company, commercial product, process, or service does not constitute or imply an endorsement or recommendation by CashCourse or the National Endowment for Financial Education. These courses and related resources may be used only for nonprofit, noncommercial educational purposes. CashCourse makes every effort to keep the information in these courses current, but, over time, new developments as well as legislative and regulatory changes may date this material. If you discover inaccurate information, please contact us.)

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