Buying a new car is a financial commitment. Sure, it’s not a house, but it’s still something that typically requires a loan you would be paying off for a while. According to an analysis from Kelley Blue Book , the average car price less than 6 months ago was $34,861. This price leveled off slightly from previous months, but has generally risen over the last few years.
When you factor in depreciation, insurance, maintenance, and gas, having a car isn’t cheap. AAA found the average cost of owning and operating a new car in 2017 was $8,469 annually. Small sedans were the cheapest to operate, while pick-up trucks were the most expensive.
Because depreciation is one of the biggest annual costs, the longer you own your car, the more that initial investment pays off. According to Edmunds, a new car depreciates 15% to 25% every year during the first five years (half of which happens immediately after you drive off the lot). However, maintenance costs can obviously go up as a car ages. These are all things to consider when you head to the dealership to purchase your new car.
When you do, odds are you won’t just have $35,000 in cash lying around. That means you’ll likely need to take out an auto or personal loan to buy your car. Deciding which car to buy, understanding how much it’s worth, and choosing a payment option can seem overwhelming, but it doesn’t have to be.
Figuring out the Value of a New Car
To start: What will you use your car for? How much do you drive? Do you need certain features or capacity? These are all questions you should answer for yourself first, and then do research on which cars meet your requirements and fit your lifestyle.
Fortunately, there are a number of well-respected pricing guides to consult for an appropriate price range once you narrow down your car choices: Edmunds’ offers a True Market Value guide ; Kelley Blue Book has suggested price ranges for various cars (particularly useful for used cars); the National Automobile Dealers Association’s guide is dealer-focused; and Consumer Reports provides detailed reviews and reports about specific makes and models.
These all simply offer a price range for the car you want. You’ll also want to investigate any incentives or financing deals that dealers are offering. You can even call around for price quotes, so you’ll be informed by the time you walk into the dealer.
As already mentioned, the value of your car goes down over time. The costs of depreciation are usually spread over a five-year period, with the car depreciating further each year. The other factor when considering the true cost of your car is the potential increasing maintenance costs over five or 10 years. The biggest ongoing cost of the car, though, is the car loan itself, which brings us to the next step in your car buying process.
How to Get a Car Loan
Once you know which car you want and what you can afford, how do you pay for it?
For most of us, the negotiation part of buying a new car is the most daunting. This is why you want to go in understanding the price range for your desired car—ideally, you’ll also be equipped with a few comparable quotes from other dealers.
It’s a good idea, when speaking with a car salesperson, to ask for the actual sales price instead of monthly payments, because it can be difficult to keep track of the overall price when talking about monthly payments and payment periods. And don’t rush: Test-driving, negotiating, and finishing all the paperwork will take some time, and that’s okay.
One of the final factors in the process is deciding on a payment option. Car loans are usually offered by car dealers on 36, 48, or 60-month payment plans, but you can also obtain one—sometimes at more favorable terms—from a bank or private lender. Car dealerships are typically set up to get you a car loan quickly you could even sign the auto loan and drive off the lot that day.
However, banks or private lenders may offer better interest rates and more favorable terms, though they have their own eligibility criteria. The average interest rate in 2017 was 4.2% on a 60-month auto loan and the average is a 12% down payment on your car loan. That interest rate varies based on a variety of factors.
Car Loans Versus Personal Loans
As the names imply, a personal loan can be taken out for any number of personal expenses—home improvements or a vacation, for example—whereas a car loan can only be taken out to pay for a car.
In essence, a car loan works much like a mortgage. It is paid for in monthly installments and the asset isn’t fully yours until the final payment is made. The car is the asset that secures the loan, which means if you default on payments, then the lender could seize your car. Because it’s a secured loan, that also means interest rates tend to be different than unsecured loans. However, there’s no getting around the fact that the car loan is tied directly to the car.
Funds from a personal loan can be much more flexible, meaning it can be used not just for purchasing your car, but for the other costs of owning a car as well. Personal loans can also be secured or unsecured. If you choose an unsecured personal loan the repayment would not be tied directly to the car, as it would for a secured loan, so it means your car won’t necessarily be seized if you miss a payment. Personal loans also generally have fixed interest rates that don’t change over the life of the loan. While a car loan at the dealership can be obtained faster, if you have your personal loan approval in hand before you go to the dealership, it also can take a step out of the negotiation process.
Even if you have already purchased a vehicle, a personal loan could be a good low-interest (and less expensive) way to pay for your car and car expenses. Refinancing a car with a personal loan can save you some serious cash in the long run. Plus you get the advantages of an unsecured loan, meaning your car isn’t on the line.
If you’re interested in taking out a personal loan to buy a car, find out if SoFi’s personal loans are right for you, by checking out SoFi’s low fixed and variable rates.
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