What Should I Know Before Buying a Car
*Disclosure: This page may contain affiliate links. We receive a small commission if you purchase something we recommend (at no cost to you). All opinions remain our own.
What should I know before buying a car? Have you ever asked yourself this question? I know I have…
I bought my car three years ago. Once I test drove it and decided it was the one, the very next thing out of the sales guy’s mouth was, “How much do you want to pay a month?”
Now, on the surface, that might not seem like an unreasonable question, especially since most people go into a car purchase with an idea of what they want to pay. But that is actually a trick question, and I’ll tell you why.
For a lot of people, a car is their first major purchase, and it’s often our second biggest purchase next to a house. But in spite of that, a lot of people don’t know the right way to go about it. As a result, they end up making a few costly mistakes.
So whether you’re thinking about buying a new or used car, here are a few do’s and don’ts that are guaranteed to save you money.
What to know before buying a car
1. Don’t ever, ever negotiate the monthly payment
I’ve been writing about finance since 2005, which includes writing about auto financing. So I’m very familiar with some of the tricks that dealerships use to increase their bottom line, and one of those is getting people to negotiate the monthly payment.
But even though I knew about this tactic, I didn’t experience it until my most recent purchase. With my two prior purchases, I secured my own financing through a credit union, so the dealership’s finance company had nothing to do with my monthly payment. However, the fact that my sales guy was eager to discuss monthly payments before negotiating the price leads me to believe that this is a common practice.
However, negotiating the monthly payment is one of the worst things you can do when buying a car. And if you do so, you could end up spending more in the long run.
When you’re only focused on the payment, the dealership will do whatever they can to achieve your ideal monthly payment. They’ll work their magic behind the scenes to get you there, even if it means increasing the purchase price, lowballing your trade-in, or even extending the loan term. So instead of paying off the car over five years, now you’re paying it off over six or seven years.
What you want to do instead when buying a car is negotiate the out-the-door price, which includes all taxes and fees, and then discuss a monthly payment based on this amount.
2. Don’t fall for 0% financing when buying a car
As an incentive, some auto finance companies will offer 0% financing to well-qualified buyers, which typically includes those with a credit score above 750 or 800, depending on the lender.
Now, if you’re approved for this offer, you might immediately think that you got a good deal. However, that is not always the case, so it’s important to run the numbers before buying a car.
What a lot of people don’t realize about 0% financing is that you often lose the ability to negotiate the price of the car. In other words, if you don’t pay interest on the loan, in most cases you’re stuck paying the sticker price.
But on the other hand, if you decline the 0% financing offer and pay interest, this can open the door to negotiations and you’re able to get the car at a lower price.
For example, if the sticker price is $27,000 at 0% for 60 months, your payment is $450, and you end up paying $27,000 for the car. But if you skip this offer and pay interest, you might be able to negotiate the price to $24,000, and if so, your monthly payment will be about $440 a month, and you’ll spend a total of about $26,500 for the car.
Now granted, in this illustration, it’s only a $500 difference, but sometimes that difference can be greater – hence the importance of doing the math to see which is the better option.
3. Don’t do spot delivery
This is basically when you take a car home before financing has been finalized.
If you get financing through a dealership, their finance department will review and approve your application on their end. But even though the dealership gives you the green light, ultimately it’s the bank that approves financing. And it can take up to a week, or sometimes longer for the bank to give the final approval.
If you take the car home, and the bank later decides not to approve your loan, the dealership will call and ask you to bring the car back. Now, I’ve never experienced this, but I know people who have, and trust me, you don’t want to go through this.
There’s nothing worse than taking a new car home, showing it to your friends and family, and then having to give it back.
If you have good credit, you probably don’t have to worry about this. But if your credit is a little iffy, and there’s a chance that financing won’t go through, you can save yourself a lot of embarrassment by not taking the vehicle home until you get the final approval from the bank.
That way, if you get a call later saying that the deal didn’t go through, or that it’ll only go through if you agree to a higher interest rate, you can walk away without anyone even knowing.
4. Don’t roll an existing car loan into a new loan
This is a mistake that I feel a lot of people make when buying a new car. It’s definitely a mistake we made in our 20s, and it ended up costing us a lot of money.
If you’re buying a new car while trading in a car you still owe money on, the amount the dealership gives for your trade-in might not be enough to pay off your existing loan. And if that is the case, they will take the remaining balance and tack it onto your new car loan.
So, if you’re buying a car for $27,000, and the remaining balance from your trade-in is $5,000, you now have an auto loan for $32,000.
As tempting as it might be, I strongly urge you not to roll over a car loan because you’re creating negative equity.
It’s often better to pay off one loan before getting into another, either by finishing the loan term or selling the car outright.
5. Don’t say you’re paying with cash
Car dealerships don’t only make money from the sale of a car, but also from the financing. So when one of their finance partners quotes a rate, the dealership might mark up the rate and pocket the difference.
This is need-to-know information if you’re paying cash. If you mention this information too early, you might lose your negotiating power.
Dealerships don’t make money on cash buyers, so timing is everything. Agree to a sales price first, and then mention that you’re a cash buyer.
6. Get pre-approved before buying a car
Even though a lot of dealerships mark up the interest rates, some don’t. So the rate their finance company quotes might be the best offer. However, you won’t know this until you compare other options.
For that reason, I always recommend getting three additional loan quotes when buying a car, and then comparing these with the dealership’s offer.
Pre-approvals are also great because you’ll know exactly what you can afford before shopping for a car.
Keep in mind, too, that a pre-approval turns you into a cash buyer (because you’re not using dealership financing). So the same way you wouldn’t immediately reveal that you’re buying with cash, don’t be quick to announce that you’ve already secured financing. This can also cause you to lose negotiating power.