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Understanding the Car Buying Process

written by: •edited by: Carly Stockwell•updated: 2/9/2016

Buying a house and buying a car are the two biggest purchases a person ever makes. So you need a car? You will be living with this decision for a long time, so do it right.

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    Understanding the Car Buying Process When a shiny, high-powered piece of curvy machinery is in front of you, many emotions will kick in: excitement, desire, anxiety, indecision. To keep these feelings from misguiding you, do your homework and think about what you are going to do before you do it.

    Otherwise, you will be driving a big pile of regret on four wheels for the life of the vehicle or the life of your debt, whichever lasts longer.

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    What Do You Need?

    First, analyze your needs. What will you do with the vehicle? How many passengers and what cargo will you carry? How many miles will you drive and in what conditions?

    Depending on where you live, all-wheel or four-wheel drive may be important. But for how many days? Do you want to spend more on the purchase and more on gas for a vehicle that drives great in the snow on those few days a year when it is bad?

    Estimate how many miles you will drive per year. How much will you spend on fuel if you get 25 miles per gallon? What about 15 or 35? How much money per month can you pay including car payment, fuel, insurance and maintenance?

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    How Long Will You Keep It?

    If you are a young student, your life in a few years may be very different. Your vehicular needs will change too. If your life is more set, what you need today may be very similar in five or ten years.

    Do you want to stay up-to-date with all the sweetest car technology? Or are you glad to have it simply get you where you're going? Must your vehicle make a statement? Some professions, like realtors and ambitious executives, need to drive something that says success. When your agent drives you from house to house in a luxury vehicle, you trust that person will close the deal. Scooting around in a bucket? You may wonder if they have sold a single shack.

    How long you keep the car and how new you want it to be will strongly affect your buying decision.

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    What Are You Driving Now?

    If you already have a car, know why you're replacing it. Have your needs changed? Is it time to upgrade? Is your car causing you headaches?

    But the biggest question is: have you paid it off? If not, call your lender and ask for your 20-day payoff. This is how much you need to give your bank to own the car free and clear. If the value of your vehicle is less than this amount, you have a problem.

    It won't keep you from driving something new, but negative equity can be a big hang-up. It comes into play especially for people looking to replace their car shortly after financing it.

    If your car is paid for, you have an instant down payment if you trade it in at a dealership. Go to NADA Guides to determine what your car is worth in your region. Use the trade-in value, not the retail. Understand the dealership is going to fix any problems with your vehicle and detail it then sell it for a profit. They will subtract those costs from the retail value of your car and offer you the remainder.

    Yes, you can get more for your car selling it privately, but it takes time. Potential buyers will show up late or not at all. After a test drive, you may learn they have no ability to pay your price. Once you have spent hours trying to sell your car, you may wish you just gave it to the dealership for less. Your new car and your old one tied up in one transaction. And you won't pay sales tax on the trade value of your car.

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    Buy, Finance Or Lease?

    How you will pay for your next ride is essential to the process. You can buy the car straight away, borrow the full purchase price or lease it for a few years.

    If you have the cash, paying the full amount up front has its beauty. Not having car payments is a wonderful thing. If you finance or lease, the bank will require you to carry full insurance. If you own the car, you can have the minimum if you're willing to risk it. Driving an old beater that is paid for with cheap insurance is a happy feeling, if you're not too self-conscious. If the car needs an expensive repair, get rid of it and move on.

    If you don't have enough cash, or any cash, then borrow. This is a familiar method. You will make monthly payments until the loan is paid off. Then you own the car.

    Is the payment on a cheap old car less than on a new one? You would think so, but no. Would you loan someone money for six years on a car that may blow up in two? Neither would a bank. The length of the loan on a used car will be shorter than a new one, plus the interest rate will be higher. So when the salesman says you could get a new car for a similar payment as a used one, he is probably right.

    Leasing is something not everyone understands. Essentially, it is a rent-to-own arrangement. You make payments on the car for a fixed term (commonly 36 months) and at the end of the term, you have three choices. You can give the car back with some fees depending on the condition and agreement. You can buy the car for a price specified in the lease. Alternatively, you can lease another car from the same company.

    An important number in the lease is the residual value. Typically, it is about 55 percent. That is the guaranteed value of the car at the end of the term. You will be financing 45% of the car's value over three years, thereby getting a lower payment.

    Leasing works well for people who like to stay current. Every three years they have a new car. It's always under warranty. You had better love the brand, though, and be loyal.

    However, leasing restricts how much you can drive. Most leases require you to drive no more than 15,000 miles per year. You will pay extra for exceeding that limit. In addition, any modifications you make to the car will need to be removed if you turn the car in, or you will pay for that too. Want to tune the engine, paint flames up the sides, chop the top, build a custom dash and replace the rear seats with gigantic speakers? Don't lease.

    We scratched the surface of the car buying experience. Hopefully you're feeling a bit smarter. Enjoy your new car!