Financial Stability

Cruising to a Smooth Auto Purchase

Buying or leasing a new or used vehicle can be a pleasure and a pain, all at the same time. Many people dread the prospect of dealing with a dealer, but they don't realize that the Internet has changed the balance of power - and now the customer has much more control over the situation than in the past.

Here are some tips for enjoying a drive along the road to a smooth auto transaction:

Research, research, research. Check auto buying guides, classified ads and especially the Internet to determine the price range, gas mileage and average repair cost of the vehicle that interests you.
Several auto-buying websites allow you to configure a vehicle to your specifications and then calculate the fair price of that car in your particular location. You also can obtain information about the dealer's true invoice price and you can get an estimate of the value of your trade-in.
This information puts you in the driver's seat when it comes to negotiations. Do not discuss price unless you have this information at your side.
Determine how much you can afford to spend on monthly payments by using the Federal Trade Commission's "Monthly Spending Plan" worksheet at www.ftc.gov/bcp/edu/resources/forms/finance-wksht.pdf
The longer your loan, the lower your monthly payments. But that can be a mixed blessing. According to the Federal Reserve Bank, the average length of an auto loan was 61 months - more than five years - in May 2008. It used to be 36 months - the duration most experts recommend. The longer the loan, the more likely you are to become "upside down" when you decide to sell, which means you owe more than your car is worth.
Compare current finance rates being offered by contacting banks, credit unions and dealerships. Be clear on the terms of the loans they offer. Dealerships often offer a range of options, including 0 percent interest and zero down. Call ahead so you won't feel pressured at the time of sale, and write down the details and the name of the person with whom you spoke. Then bring your documentation with you to the dealership. You can find an auto payment calculator here.
Leasing is the easiest way to get a new car every few years without the hassle of having to sell a car. But there are disadvantages. When your lease expires, you'll have to decide whether to pay the pre-determined lease-end price and buy the vehicle - or lease a new one. And you could be surprised by end-of-contract charges and penalties if your leased car is not in prime condition.
Consider leasing if you typically trade a new car every four years or less, want to avoid the loan down payment of 10 to 20 percent, drive fewer than 15,000 miles per year and keep your vehicle in good condition. The monthly payments in a lease contract are lower because you are paying only the estimated depreciation on the vehicle while you have it.
Why buy used? The answer: sticker shock on new cars and the speed with which new cars depreciate. The value of a new car drops by as much as 40 percent in the first two years. Thus, a three-year-old model could save you as much as 30 to 40 percent off the original sticker price. On the other hand, used cars generally carry shorter warranties and might contain hidden defects.
As you plan your auto purchase, keep in mind the 8 percent rule. The average consumer pays 11 percent of his or her gross monthly income on a car payment, but as a rule of thumb, lenders want you to pay no more than 8 percent of your gross monthly income. Mortgage lenders don't like to see more than 36 percent of your gross monthly income devoted to debt, including car payments.

Here are some resources for more information about prices, financing and other issues related to car buying:

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