5 Things to Do Before You Ever Buy a Car

Source: Flickr / Sean McGrath.

Are you in the market for a new car? Make sure you do these five things before you ever sign up for a new loan.

The car industry
As 2014 continues to plug along and the American economy continues to gain steam, many Americans are now searching for new cars. Experian, in its State of Automotive Finance Market, noted last year continued to mark a rebound for the automotive industry, as loan balances grew 11% on the year to $798.5 billion, which was the highest mark since 2007. 

One of the reasons behind this gain is the growth in car sales, which stood at 186 million in 2013, which was almost 50% higher than the levels seen in 2009. However this number was still well below the industry standard seen in the years before the financial crisis:

Source: U.S. Department of Commerce: Bureau of Economic Analysis

And while there are clear signs of a rebounding automotive market, Polk, a research firm, found in recently the average age of passenger cars and light trucks on the road in 2013 reached a staggering 11.4 years, well above what had been the historical case:

Source: Polk 

Yet with many Americans now more comfortable with making a big purchase -- for the average American, a transportation costs are the second biggest monthly expense -- there are five things you should absolutely do before a loan is taken out to buy a car.

1. Consider what you can afford
As with any major financial decision, sit down and review your personal finances to ensure you make the right decision as to how much you can afford. The average American spends 17.5% of their income on transportation.

Source: Flickr / meddygarnet.

Also be sure to remember with the purchase of a car, there are also taxes, insurance, and maintenance expenses (unless it's new and under warranty) -- so simply thinking about the monthly payment can lead to big trouble.

2. Review your credit
In addition to affordability, check your credit score -- remember it can be done once a year for free -- to ensure the numbers the financial firms pull on you is accurate. Correcting any mistakes or errors in your credit report could lead to a lower rate, and it will also help guide what you can expect your interest rate to be.

3. Shop around
Just like it's important to consider different makes and models, consider different lenders for the purposes of financing a vehicle. While the difference between a 4% rate and a 6% rate doesn't sound all that significant, it means more than $1,000 more in interest payments over the course of a 5 year loan on a $20,000 car.

4. Don't only think about monthly payments
One thing many lenders offer is the ability to get you any car at any monthly payment. For example, it may sound appealing to drop your monthly payment by $55 on a $20,000 loan financed at 5% by going from a 5 year loan to a 6 year loan, but it also means you'd pay nearly $550 more in interest over the lifetime of the loan:

In addition, consider most new cars lose around 40% of their value within the first three years. That means making a lower monthly payment could ultimately result in you owing more than what the car is worth, which always a little scary. Of course, if you plan on owning the car well beyond when it's paid off and you stop making payments that reality won't matter much, but it's still something to keep in mind.

Source: Flickr / Bravo_Zulu_.

5. Understand the total terms of the deal
As a final consideration, always be sure to carefully read through the paperwork before any deal is signed. While you can trust your dealer, make sure you see any verbal agreements are reflected in the written contract which you ultimately put your signature on. And as always, if anything gives you hesitations, seek out the opinion of experts, and don't feel rushed into making a decision on a major purchase.

There are other things you can do when making a car purchase -- but these five are critical when you're in the market for a new car.

The complete guide to buying cars
While understanding the financing of a car is critical, there are countless other things that need to be learned. You may not know it yet, but you probably spent $1,000s more than you should have on your vehicle. In fact, the auto industry can be such a dangerous place for consumers that our top auto experts are determined to even the playing field. That's why they created a brand-new free report on The Car Buying Secrets You Must Know. The advice inside could save you thousands of dollars on your next car, so be sure to read this report while it lasts. Your conscience, and your wallet, will thank you. Click here now for instant access.

Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 22, 2014, at 3:47 PM, KimChang1986 wrote:

    Buying a car is a form of psychological warfare... forewarned is forearmed!

    The dealership wants you to pay more than MSRP with the add ons...they cleverly put an additional price tag on a vehicle with the "options" they have added. For example, three of the biggest rip offs are pinstriping, fabric protection and paint sealants. They charge an additional $200 to $300 for pinstriping that costs the dealer $20 a roll for (and they can do a pinstripe job on at least two cars with a roll of the striping tape), $300+ for fabric protection when the cost of a couple of cans of Scotchguard is $20, and $300+ for paint sealant, whih is nothing more than a $20 bottle of car wax and must be re-applied every 6 months or so or the "warranty" is void.

    Trust me.. they love someone who comes in with the doe in the headlights look.

    They hate educated consumers.

    Also - check insurance prices before you buy. U don't want to buy a car that will cost $100/month to insure. You can probably get insurance for around $25/month (check 4AutoInsuranceQuote). Oh yeah, and don't buy a gas guzzler either!

    It isn't really a lot of work.. an hour of reseacrh can be done on line, saving thousands in the showroom.

  • Report this Comment On March 23, 2014, at 2:58 PM, ddboyztwentyfour wrote:

    Each time I went to buy a new car, I went in with the payment I could afford, the bank approved loan, and what I wanted, I found the car I liked, and that was it. The dealer was great, they handled everything and I walked out with the payment and the car I wanted. Being a female, I think the car dealers think they can fool you and trick you into something that you don't want. They try to talk you into something and scare you too. The dealers think you are stupid. Now, I buy used, and get the same car that is in good shape for way less. I don't buy new. Things have changed drastically for the past. My advice to all is buy used.

  • Report this Comment On March 23, 2014, at 4:45 PM, JohanStrauss wrote:

    My advice to all is to get your loan from a credit union. Not a member? Then, become one.

  • Report this Comment On March 23, 2014, at 7:24 PM, 96redse5so wrote:

    Is this article about buying a car or about buying a new car. Your title suggests the former, while your article seems to be about the latter. You know there's a difference, right? Did you know that people buy millions of used cars every year?

  • Report this Comment On March 23, 2014, at 7:29 PM, 96redse5so wrote:

    When buying a new car, don't even think about discussing the msrp or the sticker price. It's a complete fiction to fool the gullible. You might as well he discussing unicorns.

    Do the research and find the bottom line price a dealer will need to break even an negotiate from there. The msrp has nothing to do with any thing.

  • Report this Comment On April 07, 2014, at 11:58 PM, ttompson wrote:

    This is all really great advice. I've been looking into buying a new car lately. I think It would be really good to have a nice gas efficient car.

    Tara |

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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