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(ARA) - For many Americans, a car is the second largest purchase they make. Advertisers devote millions of dollars to convince us that we deserve to own the hottest set of wheels. The same people who used to yell, "I want my MTV!" are now shouting, "I want my SUV!"
But step inside a dealership, and confident car shoppers are like deer in headlights when confronted by aggressive sales people, confusing financing decisions and a fear of buying more than they can afford.
IHateFinancialPlanning.com, the Web site for the three out of four Americans who hate financial planning, can help sort out the financial aspects of buying and leasing cars. While you crave an SUV, you may discover that the cost of insuring it and filling its huge gas tank will blow your budget off the road.
IHFP offers the following tips to make sure you don't get caught in the headlights:
Get Your Records Straight
One of the first steps in financing a car is to get a grip on your credit rating. Unless you intend to pay with cash, you will have no secrets from the car dealership, finance company or auto insurer. A poor credit history can result in a higher interest rate or even loan disqualification. Also, bad marks on your credit could flag you as an insurance risk, translating into higher premiums.
"There are numerous resources available to help you understand and manage car financing," says Suzanne Hunstad, of IHateFinancialPlanning.com. "Armed with knowledge, you can determine if your loan will be approved, and at what interest rate, and also catch any glitches that could be making your credit history look worse than it is." Hunstad suggests contacting the major credit reporting agencies to obtain your credit report and taking steps to clean it up if necessary.
Cut Your Premiums Down To Size
Before you buy a car, find out what it will cost to insure it. Get car insurance quotes and calculate your insurance needs on the Internet. Each state has different requirements when it comes to auto insurance, and we'll leave it up to you to learn what your state requires. But every state has some sort of financial responsibility law that says you need to take care of any accidents you might have.
To Buy Or Lease, That Is The Question
When you lease, you're paying to use a car. Your payments cover the cost of the vehicle's depreciation while you drive it, rather than its purchase price. If driving a new car is more important to your lifestyle than owning one, leasing is definitely for you. However, if you put a lot of miles on a car every year, it may end up being smarter for you to buy. Consider your personal expectations and financial situation when reviewing the pros and cons of each:
Buying Offers:
A chance to trade in that old clunker.
Ownership and equity in the car.
Control of your wheels. If you want to add eight speakers or take out the backseat, go ahead.
No penalties if you don't hold up your end of the maintenance agreement, although you will want to service your car to enhance both its service to you and your ability to sell it in the future.
No mileage limits.
Payments based on the value of the car, not its depreciation. That may mean higher monthly payments than with a lease.
Leasing Offers:
A cost-effective alternative to buying a car every few years.
An affordable way to drive a car that you may not be able to afford to buy. Monthly lease payments are generally less than financing payments.
A maintenance contract that requires you to keep the car in good shape and not make any alterations to it.
A factory warranty that almost always covers the car for your entire lease, so major maintenance isn't your financial responsibility.
Annual mileage limits (about 12,000 to 15,000) with significant penalties if you put more miles on it than the lease stipulates.
Payments that may be income tax deductible if you're leasing the car for business. Ask a tax advisor for details.
Penalties if you terminate the lease earlier than agreed. Charges vary.
Financing Is The Next Step
Whether you buy or lease, be prepared to walk away from the deal if you aren't convinced you're being offered a fair price. Do some homework before you walk in -- car salespeople are amateur psychologists who'll get inside your head if you let them, all in the name of making a buck.
"If they see you drool over a leather interior or if you don't know the Kelley Blue Book value of your trade, they've got you right where they want you," Hunstad says. The Internet is a good resource for your research. Use Edmunds.com to comparison-shop and find each model's true market value, i.e. the price of the car in your area. It's usually a different number than either the invoice price (what the dealer paid) or the sticker price (what the dealer wants you to pay).
Once you've got those numbers down, try IHateFinancialPlanning.com's loan calculator to help you compare interest rates, monthly payments and overall purchase price. Don't get emotionally attached to your car salesperson or the loan officer at the car store. Keep this a business decision. Shop for the best interest rate at your local bank or credit union, or use online banking to comparison shop.
About the Author
Courtesy of ARA Content, www.ARAcontent.com; e-mail: info@ARAcontent.com