New Car Offers and Financing Incentives Could End Up Costing You More
By Julie Jaggernath
A lot of dealerships are starting to clear out their inventories, to get ready for the new models, and offering great deals and low payments on new cars and trucks. Some are even offering to lend you extra money so that you can pay off your credit cards. This can be a tempting offer if you're behind on your bills because you've had to sink money into fixing your current car or truck or had other expenses.
Replacing a vehicle is a big decision. Look past the enticing offers and let your budget help you decide if now is the right time to buy. This will ensure that you make a smart financial, rather than emotional, commitment to your ride.
Consider Transportation Alternatives Before Buying a New Vehicle
Before you start thinking about buying a new car or truck, think about what you really need it for. You might be able to save some money, even for 6 – 12 months by taking transit to and from work. Insurance, fuel, maintenance and finance payments really add up, so the money might be better spent paying down your other debts or topping up savings. Some people park their vehicle for 4 - 6 months every year, just to save a bit of cash.
Even if you were to take a taxi once a week, or chip in when sharing a ride with a friend, it would still add up to much less than buying a new(er) vehicle right now.
What to Watch Out for with New Car & Truck Low Interest Loans & Incentives
If you decide that you do need to buy a vehicle, here are some things to keep in mind:
Budget for Monthly Not Weekly Loan Payments
Most people don’t budget for weekly loan payments, so while they may look small, calculate what the equivalent bi-weekly or monthly amount would be. The average month has 4.2 weeks, so take the weekly payment amount that's advertised on the sticker and multiply it by 4.2, e.g. $137 X 4.2 = $575.40. A payment of $575 a month looks a lot different than $137!
Beware of Cash Back Offers and Included Gifts
Cash back or a sunny holiday may seem like it would solve your problems, but the extra cash is added to the price of the truck. This means that your loan will be higher and for more than the purchase price of the vehicle. A vehicle is a depreciating asset, meaning that it loses value over time, so you won't be able to sell it to pay off the loan if it were to get to that point.
Deferred Payment Incentives
"No payment for 90 days" means that you don't need to pay right now, but you will still need to make up those 3 months of payments at some point. Your loan or financing offer will include the equivalent of 90 days worth of payments in the balance owing, whether it's tacked onto the end of your loan or a little gets added to each of the other payments. Either way, unless you have 0% interest, you'll be paying interest on those "skipped" payments until they're fully paid, which could be the entire term of your loan.
0% Interest Offers and Financing Charges
Only buyers with really solid credit ratings qualify for 0% financing. The deal may not be so great if your loan is at 7% or more. Resist the urge of roping a close friend or family member in to co-sign for you because if you run into trouble making your payments, the lender will ask them to pay for you – and that can be awkward.
The business office at the car lot or dealership will also try to charge you a fee for preparing the paperwork. While they may make it sound like it's a non-negotiable amount, ask to have it waived anyway.
Buying Out the Vehicle at the End of the Term
Sometimes the low interest period (e.g. 48 or 60 months) won’t be long enough for you to repay the entire loan with monthly payments you can afford or qualify for. If this is your situation, you will face a buy-out at the end of your loan, just as there can be with a lease. This comes as a shock to many people, and they're forced to get another loan or surrender the vehicle if they can't make the pay-out.
Budget for Car Maintenance and Warranty Work
If you buy a new car, you must adhere to the required maintenance schedule in order to maintain the warranty. Don’t forget to factor these costs into your budget. The dealer will also try to up-sell you with service packages. Be aware of what is need in repairs, required to maintain your warranty and what is extra.
Consider Buying a Good Used Car or Truck
Many financing offers are also extended to used vehicle shoppers. A good used car or truck is easier on the budget and someone else will have had to absorb the first big drop in value. Shop around for the right used vehicle, have it inspected and read online reviews about it from other owners. If the used car or truck you're considering is less than 5 years old and the mileage isn't too high, it may even still be covered by part of the original warranty.
The Bottom Line - Where the Rubber Hits the Road
It’s easy to dream about yourself behind the wheel of your shiny new vehicle, but without a little planning, your new car or truck can turn your dreams into a financial nightmare.