Buying a Vehicle JROTC Edition PDF

BUYING A VEHICLE JROTC EDITION TABLE OF CONTENTS Before the First Test Drive............. 03 Keys to Buying a Vehicle.............. 05 How Much Can I Afford?.............. 08 A Tale of Two Car Buyers.............. 10 Protecting Your Purchase............. 14 Understanding a Lease..................

BUYING A VEHICLE JROTC EDITION TABLE OF CONTENTS Before the First Test Drive............. 03 Keys to Buying a Vehicle.............. 05 How Much Can I Afford?.............. 08 A Tale of Two Car Buyers.............. 10 Protecting Your Purchase............. 14 Understanding a Lease............... 15 2 BEFORE THE Buying a car can be an exciting experience! It’s a FIRST major purchase. It’s yours TEST DRIVE and it can give you a sense of absolute freedom! But you need to stop and think before you get too carried away comparing the horsepower, sound systems, colors or even safety features. It’s good to get your facts and your priorities straight to help you make the best decision for your finances, lifestyle, and personal needs before you start shopping for any vehicle. Buying a new vehicle can impact your finances for the next five to 10 years, so it’s important to get it right. 3 PREPARING TO BUY DECISIONS, DECISIONS... Buying a vehicle is likely the first major financial decision you will make. The following points can help you get it right. Believe it or not, life can change on a dime and »» Budget: Even if you think you can afford to spend a large your priorities can change overnight. Some of those amount of your pay on a vehicle, it’s probably not a good idea, changes can even affect the type of vehicle you or it won’t be at some point in the future. It’s important to have need, or if you need one at all. money for other things as well — some you might not even be So how do you settle on the right type of vehicle? thinking about at this point. Consider the following: »» Total Vehicle Costs: To balance other financial goals, try to keep total transportation costs under 10% of your gross »» Living Situation: Do you even need a vehicle if pay. To be fair, this can seem very difficult when you’re first you plan to live in a city where parking will be an getting started, but spending less is typically better than issue? Spending money on a vehicle you rarely spending more. See page 8 for more information. use isn’t the best financial move. »» Credit Reports: Be sure to review your credit report before »» Family Dynamics: Your vehicle needs could applying for an auto loan. That way, you can correct any errors change if you get married (or divorced) or have that could prevent you from getting a loan or getting the best children. interest rate possible. It’s also a good idea to check your credit »» Financial Goals: Money spent on vehicles score so you have a solid idea of what to expect when it’s time cannot be used for other financial goals. to finance your purchase. You can obtain a free copy of your credit report every 12 months at annualcreditreport.com. »» Income Changes: Your income in the future could be less than it is today. Be careful not »» Down Payment: Even if you can secure 100% financing, to commit too much of your current budget to it’s still a good idea to put money down to decrease your transportation costs. chances of being “upside down” with your loan — a situation that happens when you owe more than the vehicle is worth. Plus, setting aside money each month for a down payment is It’s a good idea to consider these points before you good practice for making loan payments. go on your first test drive. Remember, if things can change overnight, consider how much can change »» Insurance: It’s a great idea to get a quote on auto insurance in three to five years before your lease or auto loan before you head to the dealership. is finished. »» Financing: There is power in knowing the interest rate and loan amount you can borrow from your bank or credit union before you step on the lot. That way you can make an informed choice if presented with options of 0% financing or cash-back. You can also use this information to negotiate better financing terms with a dealership. »» Research: There are plenty of online resources that review price, safety, reliability and cost of ownership. Also, be sure to look into resale value in case you have to sell the vehicle for some reason before you planned. 4 KEYS TO BUYING When it’s time to buy a vehicle, many people make the mistake of thinking it has to be new. While new vehicles certainly have their benefits, those A VEHICLE benefits can be expensive. Buying a used vehicle can avoid these extra costs and would be a better financial fit for a tight budget. NEW VEHICLES MAY OFFER: »» Lower loan rates »» Full warranties — typically for the first 36 months or designated mileage, whichever comes first »» Latest safety features and technology »» Less maintenance cost and a clean vehicle history USED VEHICLES COULD PROVIDE: »» Lower purchase price »» Limited warranty if it’s a certified pre-owned vehicle »» Lower taxes and lower licensing and registration fees — based on price »» Unexpected maintenance and repair costs not covered under warranty 5 YOUR BUYING OPTIONS ONLINE BUYING SERVICES An online buying service matches you with dealerships offering the vehicle you want at a price you want to pay. While some services only provide contact information for a dealership, others provide a negotiated price and arrange for delivery. NEW-VEHICLE DEALERSHIPS These are brand-specific dealerships. While their focus is on selling new vehicles, most also have a used-vehicle inventory. Many dealers also have an Internet sales department and a certified pre-owned vehicle program that may offer lower prices for select vehicles. USED-VEHICLE DEALERSHIPS These facilities may offer vehicles that are priced below those you will find at new-vehicle dealerships — but many don’t provide a warranty or any repair service. They may also have older vehicles in poor condition or that have been damaged and repaired to resell. Exercise caution. Know the reputation and any complaint history of the dealership. Go to the Better Business Bureau at bbb.org for ratings or complaints about any business. USED-VEHICLE SUPERSTORES Here you can find nearly new vehicles that have been inspected with good warranties from every major vehicle manufacturer. Prices may not allow for negotiation and may be higher than those at traditional used-vehicle dealerships. Any warranties may only be in effect for a very limited time, so ask questions and read any terms of sale. PRIVATE SELLERS When buying from a private seller there are often no guarantees, no paperwork or titling assistance, nor easy remedies for disputes. This doesn’t mean you should avoid private sellers, you just need to be more cautious. Always get an inspection from your own mechanic and if possible, obtain a vehicle history report. TIP: Don’t limit your search for a vehicle to only those that are nearby. You might land a better deal if you are willing to drive a little farther. 6 LET’S MAKE A DEAL Once you’ve narrowed your choices to a specific model or two, it’s time to negotiate. Keep these tips in mind: »» Get pre-approved to buy a vehicle through your bank »» Know the value of any trade-in based on its condition before or credit union. This will give you strength in negotiating you go shopping. Then, negotiate the trade-in price as a dealership financing rates. separate transaction. »» Negotiate outside of the dealership. This is often more »» Research competitors’ pricing and factory invoice pricing — effective than at the dealership where inventory, emotions, the actual cost to the dealer for that vehicle — to give you and the sales environment can contribute to a poor financial an upper hand in the process. decision. »» Be prepared to walk away if the negotiations become »» Don’t be drawn into a conversation with a salesperson uncomfortable. about monthly payments. Focus instead on the base price you are willing to pay for the vehicle. 7 HOW MUCH Your total transportation costs should not exceed 10% of CAN I AFFORD? gross pay. HOW MUCH VEHICLE SHOULD I BUY? MORE THAN A CAR PAYMENT A bank or credit union considers your credit score, debt-to-income ratio, and ability to make a payment when determining how much they will lend. But you should do more. When you’re shopping for a vehicle, consider not only the payment, but also insurance, gas, maintenance, and repairs. A lot can happen in the next few years. You may move to a new city for school or work and the cost of insurance and gas could vary greatly. Simply put, a loan payment gets you on the road, but insurance, gas, maintenance, and repairs keep you driving. Remember to budget for these costs accordingly. AFFORDABLE PAYMENT Angelina, a young service member, is MONTHLY TRANSPORTATION BUDGET $375 shopping for a new vehicle. Her gross pay is $3,750 per month. Knowing that it’s good to keep total transportation costs under GAS, INSURANCE, MAINTENANCE $175 10% of gross pay, let’s see what monthly payment Angelina can afford. AMOUNT LEFT FOR PAYMENT $200 AFFORDABLE LOAN After accounting for gas, insurance and maintenance costs, Angelina’s monthly budget leaves $200 for a vehicle payment. LOAN AMOUNT $11,000 By financing for five years with an interest rate of 3%, Angelina’s monthly payment will allow for an $11,000 loan amount. DOWN PAYMENT $2,000 Angelina has also saved a down payment of $2,000. This means she should shop for vehicles priced around $13,000. TOTAL VEHICLE PRICE $13,000 8 THE COST OF FINANCING When a financial institution lends you money to purchase »» Loan Term: The scheduled length of time for the loan. a vehicle, each payment includes an expense or cost for Even though longer loan terms mean lower payments, borrowing. This cost to borrow is called interest. they also mean more payments and more interest. In addition, lenders typically charge higher interest rates There are two factors that will affect the amount of interest you pay on longer-term loans. during the life of a vehicle loan: »» Interest Rate: This is the percentage rate the lender charges you Your goal should be to minimize your interest costs, to borrow money. The higher the rate, the more interest you will not just lower your monthly payment. The obvious ways have to pay. Interest rates are determined by a number of factors, to do this are to borrow less, negotiate a lower interest with your credit score being one of the most important. rate, and keep the length of the loan short. You can also reduce the amount of interest you pay by making additional principal payments. 3 Years 5 Years 7 Years Loan Amount $25,000 $25,000 $25,000 Interest Rate 4% 5% 6% (APR) Monthly Payment $738 $472 $365 Total Paid $26,568 $28,320 $30,660 The longer you finance, the more it’s going to cost you. Here’s how much interest you’ll pay given each of these three scenarios. Total Interest $1,568 $3,320 $5,660 9 A TALE OF TWO CAR BUYERS THE CARS INTRODUCTION In our tale of two car buyers, we meet Alex and Chace as they each purchase a new car. They have similar jobs and similar incomes, they’ve been pre-approved for loans with the same interest rate, and neither plans to make a down payment. HONDA CIVIC LX PURCHASE PRICE: $21,450* The story begins on a dealership lot and then follows our buyers through the next five years of their lives. What happens when one of them purchases a fairly expensive dream car instead of something better suited for his financial situation? Let’s find out. HONDA CIVIC TYPE R PURCHASE PRICE: $36,395* *These examples are for illustrative purposes only. Purchase price does not include taxes, title, license or dealer fees. 10 CHAPTER 1: THE DECISION A Tale of Two Car Buyers, continued PURCHASE PRICE: $21,450 PURCHASE PRICE: $36,395 PAYMENT PER MONTH: $385 for 5 Years PAYMENT PER MONTH: $480 for 7 Years ESTIMATE PER MONTH: INSURANCE $100, GAS: $90 ESTIMATE PER MONTH: INSURANCE $175, GAS: $150 Alex: Alex likes both the Honda Civic LX and the Honda Civic Type R, Chace: After test driving both cars, Chace is excited and so the salesperson urges him to explore payment options for each wants to get the paperwork going as quickly as possible on vehicle before making his final decision. his dream car, the Honda Civic Type R. The Civic Type R is more expensive, but the finance officer explains The finance officer explains a five-year loan payment will be Alex can lower his monthly payments by extending the loan for over $650 per month. A disappointed Chace considers how he seven years. As tempting as this idea sounds, Alex doesn’t want to can make this purchase work. Maybe he cuts his contribution finance any vehicle more than five years. He’s heard that a car loses to his emergency fund or changes his cell phone plan? Before value as soon as it leaves the dealership. Alex has also heard you he can come up with an answer, the finance officer explains he should keep your total transportation costs — payment, insurance, can lower his payment to under $500 by extending the loan to gas, maintenance, etc. — under 10% of your gross income. Both seven years. The idea of paying for seven years doesn’t bother cars will cost him more than this, but he’d still like to keep his Chace because this is his dream car and he plans to keep it transportation costs down so he can save money for other goals. forever. Chace is sold! Taking all of these factors into consideration, Alex decides to buy the Civic LX. The Bottom Line: The best way to balance multiple financial goals is to keep total transportation costs under 10% of gross income. 11 CHAPTER 2: THE MOVE A Tale of Two Car Buyers, continued ESTIMATED VALUE: $9,300 ESTIMATED VALUE: $18,500 BALANCE OWED: $8,400 BALANCE OWED: $21,300 EQUITY: $900 EQUITY: -$2,800 Three years pass. Alex has a job offer in New York City. It’s After three blissful years, Chace learns his employer his dream job and he is excited about the move. He’s enjoyed is relocating him to Alaska. Clearly, he is going to need a his Honda Civic LX these past three years and, because he vehicle better suited for snowy weather. Like Alex, Chace bought a cheaper car, he has been able to save $200 per has a friend who is willing to buy his car. Even better, he’s month towards his other goals. willing to pay the $21,300 Chace still owes on it. Unfortunately, he can’t take his car with him. Alex’s apartment But then to their surprise, the bank says it’s not willing to lend is in the city and parking is costly. Luckily, a good friend his friend that much because the car is only worth $18,500. would like to buy his car immediately. The two do some online In other words, Chace owes $2,800 more on the car than research and agree the car is worth $9,300. After three years what it’s worth. This is called negative equity or being of payments, Alex still owes $8,400. “upside down.” It happens when a vehicle loses value faster Though he’s sad to see his car go, he’s able to pay off the loan than the loan is paid down. and keep $900 for himself. Ultimately, Chace sells his car to his friend but has to come up with $2,800 immediately to provide a clear title. The Bottom Line: Do not finance a vehicle more than five years. 12 CHAPTER 3: THE TOTAL LOSS A Tale of Two Car Buyers, continued ESTIMATED VALUE: $9,300 ESTIMATED VALUE: $18,500 BALANCE OWED: $8,400 BALANCE OWED: $21,300 EQUITY: $900 EQUITY: -$2,800 Three years pass. Instead of a New York City job offer, what Like Alex, instead of an Alaskan move, what if Chace’s if Alex’s car was totaled in an accident? Honda Civic Type R also was totaled after three years? Looking back at the job offer numbers, recall that Alex’s Let’s assume Chace’s insurance company determines the car Honda Civic LX is worth $9,300 after three years. Let’s assume to be worth $18,500 at the time of the accident. Since he still this is the same value used by his auto insurance company. owes a balance of $21,300, rather than getting money back like Alex does, Chace will actually be responsible for paying Since Alex still owes a balance of $8,400 on his loan, the the difference of $2,800 to satisfy his loan. insurance company will pay off this amount first*. The remaining $900 will go to Alex to use for whatever he wants. But it doesn’t have to end this way. If Chace had purchased GAP insurance when he bought the car — perhaps by doing some advance planning — he wouldn’t be out $2,800. GAP insurance pays the difference or the “gap” between the insured value of the vehicle and the balanced owed. GAP insurance is typically inexpensive — if purchased somewhere other than the dealer — and should be strongly considered on longer loans or loans where there was no down payment. The Bottom Line: Understand all the terms, conditions and options on your auto loan like GAP insurance. *Excluding deductibles. 13 PROTECTING YOUR PURCHASE Whether you purchase a vehicle using a loan, GAP INSURANCE a lease, or cash, you must carry some kind of This insurance covers the difference between a vehicle’s stated insurance. State laws require it. value in a finance contract and the amount an insurer would pay if the vehicle is damaged beyond repair or stolen before VEHICLE INSURANCE the end of the loan period. You can purchase GAP coverage Virtually all states have established minimum liability from the dealer or lender. Compare prices to find the best deal coverage limits for passenger vehicles, and many also available on GAP insurance. require uninsured motorist coverage. However, having only state liability limits can put your future financial security at EXTENDED WARRANTIES risk. If your insurance limits are not sufficient at the time of These warranties augment a manufacturer’s warranty, which the accident, you or your parents — if covered under their is typically three to four years or up to a certain number of policy — may be required to pay out of pocket. miles on the entire vehicle or on individual parts and systems. Most lenders also require “full-coverage insurance” that You may opt for an extended warranty on items that are not includes comprehensive and collision coverages to repair or covered for very long by the original warranty or if you keep replace the vehicle if it is damaged or stolen. Ask your lender the vehicle beyond the terms of the original plan. Talk to your about their mandates and confirm all coverages are in effect financial institution about any extended warranties offered or before you take possession of the vehicle. research other options. 14 UNDERSTANDING ADVANTAGES OF LEASING A LEASE The two principal benefits of leasing a vehicle are: »» Lower monthly payments »» Fewer repair costs Leasing a vehicle has its perks. You enjoy lower monthly payments, potentially no down payment, and you may be able to drive a more expensive vehicle. This is because with leasing you are not paying for the entire vehicle. You are primarily paying for depreciation, which is the vehicle’s expected drop in value during the lease. You typically have fewer repair costs since most leases span one to three years and a factory warranty is likely to cover most of the cost of anything that goes wrong. DISADVANTAGES OF LEASING The two principal disadvantages of leasing are: »» Lack of ownership »» Potentially more expensive in the long run When you are leasing a vehicle, you do not own it. There are restrictions on the number of miles, the amount of wear and tear, and customization you can make to the vehicle. Most leases will impose a charge per mile over the allotted mileage limit. When your lease is over, you can either purchase, trade or return the vehicle. In any scenario, you will probably be looking at another cycle of payments to keep you on the road. For this reason, a lease could be more expensive over the long run. 15  BUYING A VEHICLE JROTC EDITION This publication is not intended to be or provide financial, tax, investment or legal advice. It is only a general overview of the subject presented and is solely for your information. The Department of Defense does not provide professional services for financial, accounting or legal matters, nor does it endorse or promote any commercial supplier, product or service. Applicable laws are complex, the penalties for non-compliance may be severe, and the applicable law of your state may differ. Consult your tax and legal advisers regarding your specific situation. 80300-0519