Oct 08, 2019 | Debt

Why now is the time to buy a car, the smart way

It’s car-buying season! Yes, along with leaf-peeping and pumpkin-spice everything, fall signals the start of the best time to drive away a new or (even better) new-to-you set of wheels. As the end of the year approaches, the price-negotiating momentum swings to your side. Salespeople and dealerships are eager to meet quotas and move inventory, so take advantage.

Before you zero in on the car you want, you’ll need to think about financing in the form of an auto loan. The most important factor in your loan is the interest rate, and the strength of your credit is key here. The better your credit, the lower your rate and the more you save. For example, a 4% rate versus a 6% rate on a $25,000 five-year loan would save you more than $1,300 in interest.

The good news these days: The Fed’s relatively low benchmark interest rate factors in, too, keeping rates affordable from a historical perspective at about 6% on average. (Buyers with bad credit, however, can face astronomical 15% to 20% interest rates for a car loan.)

In the spirit of the season, I have a whole bunch of advice in my visual guide to car buying. But here are some of the most important car shopping fundamentals to keep in mind before you hit the lot.

• Do your homework. To give yourself a financing alternative and be better prepared to haggle at the dealership, ask at least one bank and one credit union for the rates you could get on a car loan with them, as opposed to through the dealer. Bankrate.com is a good place to start.
• Negotiate the price, not the loan payment. Keep the amount you can afford to pay each month close to your vest. If dealers know this magic number going into negotiations, they can adjust other terms (such as the sales price or the length of your loan) to match it while increasing their own take. So don’t tell them.
• Buy lightly used. Maybe a two-year-old model that’s still under warranty. Why? The average sedan loses more value in its first year than in years two through four combined. Still not convinced? Contrast the average new car loan—$32,119, with an average monthly payment of $550—with the average used car loan—$20,156 and monthly payment of $392. Note that you need to check out previously owned vehicles thoroughly (Carfax report, independent inspection) to make sure you’re not getting a lemon. Used car loans also tend to have slightly higher interest rates, so use an auto loan calculator to make sure you’ll save money. Chances are you will.
• Shoot for a short-term loan. Your interest rate is important, but it isn’t everything. The average length of a new car loan is now more than 69 months. That’s a long horizon: nearly six years of payments. I recommend a loan of four years or fewer if you’re able to afford the higher payments—you’ll save on interest overall.

One more thing: If you’re considering an electric vehicle, you’re not alone. A recent Consumer Reports survey shows that one in three car shoppers would consider buying a plug-in electric car—a milestone of acceptance for this once-quirky car class. Falling prices and eligibility for a $7,500 federal tax credit don’t hurt the appeal. For much more on shopping for electric cars as well as hybrids, check out the info Consumer Reports offers for free. Happy car hunting.