By Dara Duguay
Diane and Roger decided they needed a new car. Roger reviewed automotive magazines to check out the latest designs, while Diane browsed consumer publications that rated safety, fuel economy and reliability. They narrowed their choices to two or three models and headed to the local dealership.
They calculated how much they could afford and were confident they would avoid being "taken for a ride."
As soon as they walked into the showroom, a friendly salesman offered to pre-qualify them for a loan. It turned out their combined incomes and solid credit scores made them eligible for a larger loan than they had expected. When the salesman heard that Diane and Roger shared the car in a long commute, he convinced them they would need a roomy and comfortable vehicle.
After considering several options, Diane and Roger zeroed in on a full-size car with all the bells and whistles. They could even fit their bicycles in the back if they put the seats down. The color they wanted was in stock but only one was left, which added to the pressure to purchase the car immediately.
They chose to offer one of their cars as a trade-in, even though they could get only $400 for it. After the salesman deducted their down payment, the remaining balance on the loan translated into a monthly payment of about $800. Although they had vowed to shop around for the best deal and the best financing, they didn't want to lose the opportunity to buy this model. Within a matter of hours, Diane and Roger found themselves the owners of a new car.
The first time they took their new car to their favorite service station, they were still so enthralled they barely noticed that it cost nearly $80 to fill the tank.
Then, the unexpected happened. Diane fell off her bicycle and broke her leg in two places. She was told to stay in bed for six weeks and was not permitted to go to work for at least two months. Immediately, the couple's income was reduced by almost half.
At first, Roger was able to manage their bills on his income alone because they had some savings in the bank. Additionally, they made the first quarterly payment for their car insurance, so that expense was covered. But without Diane's full income, their resources became strained.
When the bill for the car payment arrived, Roger started to worry about how they would manage until Diane got back to work. He set it aside.
Four weeks later, another bill arrived – and Roger suddenly remembered the previous month's bill. Sure enough, a large penalty had been added to the overdue amount. Diane now felt pressured to return to work to help cover the mounting bills.
Roger was now experiencing buyer's remorse about the new car. His wife needed to get back to work before she had fully recuperated. The price of gas seemed to be rising every day, too. Why hadn't they just bought a sound used car?
Roger and Diane might not have faced such a predicament if they had kept some basic steps in mind before heading to the showroom.
Start with an honest assessment of your credit history. If possible, clean up your credit before you even think about the kind of car you'd like to buy. A better credit rating can mean a lower rate – and perhaps even the option of spending a little more.
Calculate your current finances. How much do you want to pay? Does that number match what you can afford? Make sure you'll have enough income left over to cover your monthly living expenses. Also make sure that you have enough cash in the bank to cover at least two payments in case of emergency.
Calculate your related expenses. Though that SUV may have caught your eye, additional costs for gasoline may steer you toward a more fuel-efficient vehicle. A larger vehicle may be more expensive to insure and maintain.
Calculate total costs. Although you may pay less per month for a loan that is longer, you will pay more in interest over the life of the loan than for a shorter loan with higher monthly payments. The difference between a three- and five-year loan may be more than you want to spend. Consider the total cost, with interest, and not just the monthly payment.
Shop around for loans. Inquire at local banks and financing companies, as well as the dealer. Compare the loans available to you. Record the providers, interest rates, lengths and terms.