Car Buying
They say owning a house is the American dream, but having a nice car in that driveway is also apart of that dream. Unfortunately, for many of us, the only way to own a vehicle is with a car loan. We can’t save enough or save fast enough, and it’s a necessary evil. Owing money on a car is like taking one step forward and two steps back because it’s a commodity that depreciates. Cars lose value every year, so the faster you pay that loan off, the better. One of the biggest mistakes new service members will make is purchasing a car that is too expensive and not calculating the overall costs to maintain the vehicle; car insurance, oil changes, etc.
A Private (E-2) in my company wanted a new Ford F-150. As with most new service members, this was his first time living away from home, no parental supervision, and enjoying his first regular, substantial paycheck. He’s new to the area and didn’t have a vehicle. You’ve all heard this story before. In military towns, you’ll notice many car dealerships that pull in sales compared to cities three times their size. It’s because they prey on veterans, especially young service members.
Without consulting anyone in his unit or relatives, he catches a ride to the nearest CARMAX to find a shiny truck to ride off the car lot. He didn’t realize, until later, that he fell victim to predatory lending through dealer financing, high manufacturer’s suggested retail price (MSRP), and a ridiculously high-interest rate. After getting the required car insurance, his auto payment and insurance were almost 1k. He had just enough money to pay his cell phone bill and pay for gas. He still lived in the barracks and ate at the base dining facility; thankfully, he didn’t suffer for food and shelter.
These types of mistakes often happen and severely cripple financial flexibility. Career progression happens quickly early in a service member’s career, ranks E1-E4, but wages will not substantially offset high auto loan payments. Furthermore, other expenses will continue to increase as service members ages; their apartment, wife, possibly kids. When an individual’s standard of living improves as their discretionary income rises, luxuries become necessities; Lifestyle creep. Lifestyle creep is a change in thinking and behavior that buying nonessential items as a right rather than a choice. A “you deserve it” attitude rather than thinking of the opportunities that saving money would provide. Developing a budget will help service members discern wants from needs when large ticket items. Keep in mind that a large auto loan will factor heavily into your debt-to-income ratio when or if a service member wants to acquire a mortgage loan. Keeping a manageable auto loan payment is imperative to wealth building and financial health.
CORRECT THIS MISTAKE
You can immediately refinance your car after purchasing it as long as you meet the requirements for a new loan. There is always another bank or lender that is willing to adjust your annual percentage rate (APR) and the loan terms, especially if the original APR was significantly high. The new lender will still make a significant profit if they offer you a lower rateāfor example, 18% to 10.5% over the length of the loan. Lenders are always competing for your business; therefore, you have many options and negotiating power. Talk to at least two different lenders and inform each lender of the terms offered from the other.
Make extra payments whenever possible; make bi-weekly payments instead of monthly payments. For example, once a month, equal to 12 payments a year. There are 52 weeks in a year which provides 26 bi-weekly payments or essentially one extra payment a year. Changing to a bi-weekly payment schedule allows for one extra payment per year. Also, each payment is a few days earlier, and that decreases the overall interest paid on the principal loan because interest accrues daily. If you receive a lump sum of money, like a tax refund, it’s a good idea to put some of that money towards your car note. Additionally, if you anticipate receiving a large sum, put that money towards the principal balance before refinancing. The overall loan balance will be lower, allowing for a lower car payment.
How To Buy
It’s best to get pre-approved from your current bank or credit union before you buy, like USAA, Navy Federal Credit Union, and PenFed are great for service members, veterans, and their families. Lenders at the dealership will send your information to multiple financial institutions that will run your credit each time. Conversely, your bank will run your credit once, give you a few different loan terms to choose from and give you an approval letter to show the dealer. Just remember when selecting financing terms, keep the interest rate as low as possible and as short as possible. Also, check your credit before you shop for a loan. It’ll give you a ball-park idea of your credit range.
In this age of the internet, there is no need to walk onto a car lot to purchase a car. The internet gives consumers more information than ever, making it easier to compare prices and get better deals. This eliminates car salesman influence; Edmunds, Cars.com, Autotrader are great places to start. You also have the option of buying directly from the manufacturer. Each company offers car-buying programs for service members. You can find vehicles with lower (MSRP) through these programs. Audi, BMW, Chevrolet, Chrysler, Dodge, Ford, GMC, Hyundai, KIA, Mercedes, VW all have such programs on their website. Lastly, look for promotions and end of the month deals. Dealerships may have underperforming sales in any particular month and will have a promotion to sell some of their inventory before the end of the month.
Equipped with this information, you will not fall for high-pressure tactics of car sales associates or predatory lending from lending institutions. Research, Execute, Communicate!!!