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Auto Loan Basics

The basics of buying a new or used car

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Don’t skimp on the fundamentals: Understanding the basics of buying a new car or buying a used car can make the process easier—and save you money in the long run.

You’ve decided that buying a new car (or buying a used car) is going to be your next major purchase. But how do you make sure you’re getting the best vehicle and the best deal? Understanding these 5 auto loan basics can help:

  • Budgeting
  • Vehicle research
  • Is buying a new car appropriate for you?
  • Is buying a used car appropriate for you?
  • Buying a used car from a dealer vs. a private individual

Let's look at each topic in greater detail:

#1: Budgeting

When it comes to auto loan basics, it’s best to put first things first: Figure out how much you can afford to spend. An online tool like Bank of America’s monthly car payment calculator can help you understand how much car you can afford.

If you have a vehicle to trade in, you’ll want to know its market value so you can factor that into your budgeting. Sites like NADAguides and Kelley Blue Book are good places to start. It's also a good idea to visit a few dealerships and ask for a quote on your vehicle's trade-in value.

As you focus on that monthly budget number, be sure to include the costs of gas, insurance and upkeep.

#2: Vehicle research

Visiting dealerships and going on test drives is an important part of buying a car, but you should also read as many vehicle reviews as you can find. You’ll want to know if the car you’re thinking of buying has been given high marks for safety, is reliable in terms of needing repairs and so on.

Some good places to start looking for both professional and consumer car reviews are:

#3: Is buying a new car appropriate for you?

If you’re thinking about buying a new car, here are some specific steps you can follow to help you get the very best deal:

  1. Determine the base price. This is the price of the vehicle without any special options. You can get a good idea of the base price by visiting several dealerships and websites and comparing prices.
  2. Add in the cost of optional features or packages. You may feel, for example, that buying a new car also means getting the latest and greatest sound system. Be sure to add the price of any extras you want to the base price of the car.
  3. Know how much the dealer will add on for various options. Features like antilock brakes and a security alarm can save you money on insurance costs, but they’ll cost money up front. Look at price stickers for cars at various dealers to know what these features typically cost.

Once you know the total cost of the vehicle, you’ll be in a better position to negotiate the sticker price down to or near the dealer price.

#4: Is buying a used car appropriate for you?

For most people, buying a used car is a better choice than buying a new car. The first owner of the vehicle has absorbed the biggest portion of the vehicle’s depreciation (the decrease in value), so you’ll tend to get more value for your money. But there’s more to consider than just depreciation:

Positives of buying a used car include:

  • Lower purchase price
  • Lower depreciation
  • Lower registration and license fees (which are usually tied to the value of the vehicle)
  • Potential for lower insurance premiums

Negatives of buying a used car include:

  • Reduced or no manufacturers' warranty
  • Potential for higher interest rate on your auto loan or lease
  • Potential for reduced reliability
  • Potentially higher maintenance costs such as replacing tires, battery and brakes

If you decide that buying a used car is the way to go, be sure to check the mileage carefully and make sure the car is in good mechanical condition.

#5: Buying a used car from a dealer vs. a private individual

The Federal Trade Commission's Used Car Rule requires dealers to post a Buyers Guide in every used car they offer for sale. This Guide provides a great deal of information, including:

  • Whether the vehicle is being sold as is or with a warranty
  • The terms and conditions of any warranty being offered
  • The percentage of repair costs a dealer will pay under the warranty
  • The vehicle systems (for example, mechanical and electrical) covered by the warranty

When you buy a used car from a private individual, the Used Car Rule doesn’t apply. Typically, any implied warranties of state law don’t apply, either. A private sale is generally an “as is” transaction—you'll have to pay for anything that goes wrong after you take possession of the car.

You can take much of the worry out of buying a used car by purchasing your vehicle through a member of Bank of America's dealer network.

A final thought

Whether you’re buying a new car or buying a used car, whether you’re buying from a dealer or buying from an individual, be sure to:

  • Examine the car using an inspection checklist (you can find checklists in magazines, books and websites that deal with used cars)
  • Test drive the car under various road conditions such as hills, highways and stop-and-go-traffic
  • Ask for the car's maintenance record from the owner, dealer or repair shop
  • Hire a mechanic to inspect the car
  • Check the vehicle's history with AutoCheck or CarFax

Good luck on your auto shopping—and enjoy your new wheels!

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