Buying a car: All what you need to know

The purchase of a car represents, after housing, one of the most critical expenses for a domestic economy. Many people consider the car, like the residence, as a yardstick of the success and social status of its owner. Therefore, many get into serious financial problems when trying to spend at home and car beyond their means.

But from the financial point of view, there is a lot of difference between these two purchases. The acquisition of a home is an investment because, under normal conditions, real estate is revalued over time. Normally, although it takes many years to pay the house, in the end its value is higher than when it was purchased, resulting in a profit if it is sold again. On the contrary, a car loses value from the moment it leaves the dealership. It is not an investment, but a consumption expenditure. Stretching the budget to the limit to buy a home is dangerous, but if one manages to pay well all the fees in the end receives a good reward. Stretching the budget to the limit to buy a car is simply bad business.

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In the case of an expense, it would make more sense to pay for a car in cash than to borrow for its acquisition, and many financial experts advise precisely that, but very few have that option. The vast majority need some type of financing. Assuming that there is no possibility of asking friends or family for money, the alternatives will be:

  • Financing through a bank loan.
  • Financing through the dealer or brand.
  • Leasing for new vehicles linked to an economic activity, whether it is self-employed or entrepreneur.
  • Renting , for new vehicles.

Most individuals resort to a loan, either from a credit institution or through the concessionaire. The following tips are applicable in both cases:

  • Do not buy a car that you can not afford
  • Save enough to pay as much input as possible
  • Visit several dealers to compare prices, since there can be a lot of difference
  • Compare well the financing offers of different credit entities and financial companies, you can also take a surprise.
  • Choose the shortest repayment period that suits your possibilities.

How much can you afford?

It is not worth it to fall in love with a car and be disappointed when you discover that you can not afford it. Calculate how much you can afford before looking at brands and models.

Check the budget. How much margin is left of the monthly budget? How much more could you spend without stretching the finances to the limit and without endangering the savings of the emergency fund or those destined to other medium and long-term financial objectives? $200, $300, $500? Do not compromise the safety of your family, the education of your children or your own retirement to buy a nicer car.

Buy now pay later

Remember that the expenses are not limited to the monthly loan installment. We must add the insurance, gasoline, registration, maintenance, costs that vary according to the vehicle chosen. The lower the consumption of the car, the less you have to pay in gasoline. The more expensive the car, the more insurance and spare parts cost.

Once you have a clear idea of ​​how much you can spend, limit the search to that number. Resist the temptation to buy a car that you can not afford, no matter how excited you are. It would be a serious mistake that would seriously compromise your financial health.

The entrance

Even if you get a loan, you need to have a good amount of cash for the entrance. For a new car you need to spend at least 10% of the total price. That is, for a $20,000 car you must have at least $2,000 in cash. The total price of the car, minus the entrance, will be the amount that will be financed through a loan (in this case, $18,000). The more you pay in advance, the lower the monthly loan installments will be, however, it is also not advisable to “stay two candles” liquidating all the savings. Try to pay as much input as possible without disturbing your financial situation.

Currently there are offers for vehicle financing without entry. This formula allows you to dispose of the car immediately, but monthly fees will be much higher. It will always be better for you to postpone the purchase until you have saved the entry, the bigger the better, for your finances.

Once you have calculated the ticket and the monthly installments that you can pay without suffering too much from the budget, you will have a good idea of ​​which car you can afford.

The choice of the car

It is a very important purchase that will affect your life directly and you will be paying for several years. It is convenient to make the necessary investigations to choose well.

Think carefully about how you will use the car. Do you drive mostly in the city or do you have to travel by road and motorway on a regular basis? Will you use it only to come and go from work and to make the purchase, or also for vacations? How many places are normally needed? Do you have to carry animals or loads? What characteristics are most important to you: safety, power, consumption, comfort …?

Keep in mind that dealers will only inform you of the brand they sell, and will only tell you about the excellence of their vehicles. It is better to inform yourself before going to the dealer. Internet, as well as car magazines are excellent sources of information to see comparisons of models with prices, technical characteristics, standard and optional equipment, and opinions of experts and consumers. It is also good to talk with people who know the same model to know their opinions and experiences. Once it has been decided, you can compare the offer between different dealers. And test the car in town and on the road before committing.

Financing through a bank loan

The credit institutions have extended their offer of “car loans”, calling them with different commercial names and adding new features, but in the end they are variations of personal loans. Remember to consider:

  • Type of interest
  • Opening commission and other expenses
  • Early repayment commission
  • Maximum amount to finance
  • Term
  • Monthly fee

To compare loans between entities, always use the APR, which includes the nominal interest rate and the opening commission and other expenses, which can vary a lot. Make the comparison for the same amount and same time period because these variables influence the total cost. Banks usually offer a reduction in the interest rate if, for example, they already have their payroll domiciled or they have granted the mortgage. The personal loan can be fixed or variable. If it is a variable rate, the Euribor is usually used as a reference. For example, Euribor + 0.75%. Sometimes they can also offer a fixed interest during the first year and variable for the rest. The interest rates that apply to the purchase of used cars tend to be higher than for new ones. In addition, the maximum term to repay the loan (repayment term) is shorter for used cars.

If possible, negotiate with the bank so that you do not charge early repayment commission. So, if in the future you have extra money, you can reduce the term and / or the monthly fee, and even cancel it without paying a penalty. Do not let the bank remove this commission in exchange for raising the monthly fee.

The amount to be financed (total price of the car minus the ticket), the term and the interest rate will determine the monthly payment to be paid. Always ask to see the amortization table that details the capital, interest and monthly payment to be paid during the life of the loan. Make sure your budget allows you to assume this fee plus the other inherent costs of the vehicle.

In terms of the term, the higher it is, the lower the monthly fees will be. The traditional thing was to finance cars with a maximum term of five years, but now it offers more flexibility and it is possible to find loans with terms of up to 10 years for new cars. But beware, it is not advisable to extend the term more than necessary only to lower the quota because the total price will be much higher.

Look for a balance between monthly fee and term. It is not advisable to finance a good for longer than it will be used. If you believe that within five years the car will no longer meet your needs, do not choose a longer term of financing. Remember also that you can not sell the vehicle if it is not paid. In the case of something that loses a lot of value over time, if you need to reduce the monthly fee it is preferable to opt for a less expensive car, or pay more entrance, than to extend the term. It is worth mentioning that the minimum term to return a car loan is normally 12 months, but it is usually charged a much higher interest for this short period.

Note: Even if you know the term and the funding you need, it does not mean that they will be granted. As for any personal loan, banks and savings banks want to be sure that you are going to repay the borrowed money, along with interest, within the agreed terms and deadlines. They will study your case to determine if they are interested in taking risks.

Example: a loan of $18,000 at 8% to be repaid in five years entails a monthly payment of $365. The total cost of financing (interest payable) is $3,900. If you opt for a period of four years, the monthly fee will be 74 euros more per month, but you will have gotten rid of the loan a year before and will only have to pay a total of $3,072 in interest, which means a saving of 828$.

For banks, the most important thing is to know if you have “ability to pay”. In order to determine it, they analyze your income, your debts (checking the debts you have in any credit institution) and estimate your monthly expenses based on your age, family situation, etc. (something like the personal budget). They also review your “credit history”, to check if it appears in any list of defaults.

If there is any doubt about the probability of collecting the loan, the bank may demand the additional guarantee of a guarantor, that is, another person who signs to be willing to take charge of the payment if you do not.

Financing through a dealer or brand

The main car brands offer their own financing. As advantages of financing it at the dealership, they offer ease, convenience and speed. There are many less procedures and it is an attractive option if you can not get a bank loan (although they will also study your ability to pay).

The concessionaires also give a lot of flexibility in terms of deadlines and try to accommodate the needs of the client.

Now, the client must take into account those obligations assumed with this financing. As an example, it will be necessary to pay attention to the commissions that will have to face (for example, the opening of the loan), in the possible compulsory nature of contracting insurance with a certain company (consider its cost) or if it is allowed to cancel in advance. the loan, either free of charge or with a penalty (sometimes this is to return the “discounted” amount of the vehicle price that is sometimes obtained by financing with “the brand”)

To be able to study the characteristics of the offered loan, you must submit the file of the loan, which is received in the name of European Normalized Information (INE). This should be facilitated prior to hiring, in advance and free of charge, being useful to compare the offer of financing presented in that dealer with others that may offer different entities and thus choose the option that best suits your needs and interests.

Some brands offer, as a novelty, the so-called “selective credits” for the purchase of a new car. They consist of financing only part of the total cost of the vehicle, guaranteeing a minimum value of repurchase at the end of the contract. At that time, the customer can stay the car or, if you prefer, change it with a new one from the same brand (financing the difference in value between the delivery and the new one). As only part of the total cost is financed, the monthly installments are considerably reduced.

Funding plans that consist of paying an entry, then very small monthly installments for three or four years and finally a final high installment have also become fashionable.

For example, for a vehicle with a price of $24,700, financing at 6.75% APR is offered, consisting of:

  • an entry of $9,274
  • 36 installments (3 years) of $200 per month
  • And a final installment of $10,369

Dealers usually accept their used car, even if it is from another brand, in exchange for a discount on the total price. The amount they pay is usually much lower than what you could get by selling it on your own, but the advantage is to save time and possible inconvenience.

In general, consider the same variables as for a bank loan: entry, amount to be financed, interest rate, opening commission, term and monthly payment, cost of early amortization and cost of the obligatory linked products (insurance usually). Do not be pressured by the seller. Take your time to reflect and do your calculations well. And if the car’s quota does not fit into your budget, do not buy it.

Leasing and renting

The leasing

Only ” leasing ” can be used to acquire goods related to economic activities. That is, on behalf of companies or independent professionals. It is a formula based on the “financial lease”, which becomes a lease with option to purchase at the end of the duration of the contract, usually between 24 and 72 months. After this period, the owner has the option to acquire the vehicle in property by paying the residual value stipulated in the contract, extend the contract with new monthly installments or change the vehicle through a new contract.

The leasing

Only ” leasing ” can be used to acquire goods related to economic activities. That is, on behalf of companies or independent professionals. It is a formula based on the “financial lease”, which becomes a lease with option to purchase at the end of the duration of the contract, usually between 24 and 72 months. After this period, the owner has the option to acquire the vehicle in property by paying the residual value stipulated in the contract, extend the contract with new monthly installments or change the vehicle through a new contract.

The Renting

The ” renting” is a long-term rental, usually between one and five years, with monthly fees that include not only the use of the vehicle, but also all related expenses: registration and circulation taxes, all-risk insurance , integral maintenance service, repairs, tire changes, travel assistance … Both companies and individuals can be holders of a ” renting ” contract.

Unlike ” leasing “, there is no purchase option at the end of the contract so the owner can enjoy the vehicle, but never becomes the owner of it. At the end of the stipulated period, you must return the car or renew the contract with a new vehicle. It is a formula designed for those people and companies who want to enjoy new cars without worrying about repairs, taxes and insurance.

As they include all the services, the fees of a ” renting ” are noticeably higher than those of other types of financing. Like ” leasing “, its main advantage is the tax benefits for companies and freelancers, since the monthly installments are fully accounted for as expenses. Individuals do not obtain tax advantages.

Both ” leasing ” and ” renting ” are only offered for new vehicles.

Opportunities to buy a car at a good price

Second hand cars

Nowadays, there are many companies and individuals that change their cars every two, three or four years. This means that the used car market is growing both in volume and quality. If the new cars lose value quickly, as we have already said, you can get real bargains in this market. But it is also difficult to know exactly its conservation status.

Most brand dealers have a fleet of used cars and they will help you find a specific model, in your facilities or in others of the same company. In these establishments the cars are checked before the sale and the cars are guaranteed one or two years, a very important issue for second-hand cars.

You can get a better price if you buy the car from an individual, but, yes, you will not have a guarantee. If you do not understand much about mechanics, ask a friend or family member to help you check the vehicle and check its condition. If possible, take it to a workshop for a more thorough checkup.

Cars “kilometer zero”

The dealers enroll a certain number of cars per month to meet the commercial objectives imposed by the brand. For this reason, they are obliged to register new vehicles in their own name in order to fulfill the commitments with the manufacturer. Just for the fact of having a license plate, they are considered used and, therefore, a significant discount (up to 20%) is applied to the official price, although in reality they are brand new: they are the “kilometer zero”, a Excellent opportunity if you are not too capricious with the model or color.

The supply of this type of cars is usually more abundant in June, July and at the end of the year. One drawback is that, considering a second-hand car, financing conditions can be tougher than for new vehicles.

Sometimes the term “kilometer zero” is applied to other vehicles, such as “demo” used for testing customers before buying, or those from rental companies. These vehicles have more age and mileage than the authentic “kilometer zero” so you have to check them well. Depending on their status and price they can also be a good buy.

Prevent the car from being a “bottomless pit”
Once you have purchased your car, your expenses do not end. Take certain precautions to avoid other unexpected disbursements.

Regular reviews are like preventive medicine. Changes in oil, coolant, brake pads, for example, will save you major repairs in the future. Follow the maintenance plan of the car manual so that the warranty remains valid. While under warranty, use authorized workshops. And if you want to change workshops later, ask for recommendations from friends and family. Always, always, always ask for a quote before allowing any manipulation of your vehicle.

Also monitor the condition of the tires for their own safety, but also because more fuel is consumed if they are worn out.

Car insurance

Every owner of a motor vehicle is obliged to contract and maintain in force an insurance that covers, within the legally established limits, the civil liability in which the driver may incur as a result of a traffic event. The breach of this duty is administratively sanctioned with a fine.

Remember that in this mandatory civil liability insurance the insured person is the driver, even if the policy holder is the owner of the vehicle.

In the compulsory civil liability insurance, a different liability regime is established for personal and material damages:

  • In the case of damage to persons, the driver always responds, unless it can be proved that the damage was due solely to the negligent behavior of the injured party, due to a force beyond the control of the vehicle.
  • In the case of material damages, the driver responds if they are caused by his fault or by the people who depend on him.
  • The compulsory insurance will not cover the damages caused by the injuries or death of the driver causing the accident, the damage suffered by the insured vehicle, as well as the things transported belonging to the policyholder, the insured, the owner or the driver, as well as their relatives up to the third degree of consanguinity or affinity.
  • When the damage is caused by an unknown driver, by a stolen vehicle, by an uninsured vehicle, or insured by an entity declared in bankruptcy, the compensation of the damage corresponds to the Insurance Compensation Consortium.

Voluntary coverage.

In addition, in the contract in which the compulsory civil liability insurance is formalized, other voluntary coverages may be included:

Voluntary civil liability insurance : Covers damages caused by the driver’s fault to people or property over the legal limits established in the compulsory insurance.
Insurance of own damages : Covers the damages suffered in the vehicle, as a consequence of certain causes established in the contract, such as fire, breakage of moons, without the existence of third party responsibility.
Occupant insurance : Normally this insurance consists in a provision to the occupants of the vehicle in case of accident.
Theft insurance : covers the damages derived from the illegitimate removal of the insured vehicle.
Defense and claims : Covers the expenses incurred by the insured as a result of his intervention in an administrative, judicial or arbitral procedure and provide legal and extrajudicial legal assistance services derived from driving a motor vehicle.

The main commercial denominations in the market for this type of insurance are:

Insurance against third parties : Covers any damage that occurs to a third party
Comprehensive insurance : Provides coverage for any damage suffered by the insured vehicle itself.
Full insurance with franchise : In case of loss, and provided that the person responsible was the insured, he would assume an amount of the cost of repairing the vehicle, paying the rest of the insurance company. This amount, called franchise, is fixed by the insured. This may seem an inconvenience, it is not because it supposes a direct and proportional saving in the premium (the greater the franchise, the lower the premium).
Currently there is a lot of competition among car insurance companies, which are constantly trying to attract new customers. Compare your rates, because companies use different methods to calculate risks and premiums. In general, it is cheaper to purchase insurance through the Internet and by phone. But remember that the biggest difference between the prices lies in the coverage they offer and in the amount of the guarantees in case of total loss.

If you want more information, you can consult the criteria on compulsory insurance of automobiles and information on the main types of car insurance offered by the General Directorate of Insurance and Pension Funds.

By |2019-02-07T11:28:22+00:00February 7th, 2019|Blog|Comments Off on Buying a car: All what you need to know
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