With new car prices at all-time highs and auto loan payments straining household budgets, consumer interest in finding ways to reduce vehicle purchase costs is growing.
Automotive research firm Edmunds recently introduced strategies to reduce vehicle purchasing costs, advising that thorough comparison and preparation beforehand are paramount.
Edmunds emphasized the need to fully compare auto loan terms before purchasing. Experts recommend getting pre-approved by banks, credit unions, and online lenders rather than deciding on a loan directly through a dealership’s finance manager, and then comparing those offers with the dealership’s terms.
Generally, aside from special manufacturer promotions, credit unions often offer lower interest rates, and simply comparing terms can save thousands of dollars over the life of the loan, according to the explanation. In fact, for a $40,000 auto loan with a 60-month repayment term, even a 2 percentage point difference in the interest rate (7% versus 5%) can save $37 per month, totaling $2,232.
If an applicant’s credit score is at least 720 to 740, they may qualify for zero-interest or 1% range interest rates from certain manufacturers. Compared to a 7% interest rate, a zero-interest rate saves $125 a month (totaling $7,523), while a 1.9% rate saves $93 a month (totaling $5,561).
Broadening the search range for dealerships is also a huge help in cutting costs. Visiting only nearby dealerships can limit available vehicle choices, as vehicle price discrepancies vary greatly depending on regional demand and inventory conditions.
Maximizing the value of your current vehicle is another crucial point. Getting quotes from multiple businesses to check market value before trading in your car can increase your negotiating power.
If you have the flexibility, private-party sales are also worth considering. Keeping your vehicle clean and preparing maintenance records will likely yield a higher selling price than trading it in at a dealership.
You should also avoid signing a contract based solely on the monthly payment. Stretching the loan term just to lower the monthly payment ultimately increases your total interest burden significantly.
Considering a well-maintained used car instead of a new one can also lead to massive savings. New cars feature the latest technology and manufacturer warranty benefits, but they come with high prices and heavy depreciation right after purchase.
On the other hand, a used car that is about three years old offers most of the latest convenience features at a much lower price. According to Edmunds, the average transaction price for a 3-year-old used car in June was $32,553, which is about $16,000 cheaper than the average new car price of $48,899.
Meanwhile, as vehicle prices skyrocketed during the pandemic, the issue of ‘negative equity’—where the loan balance exceeds the value of the vehicle—is also on the rise.
Edmunds stated that 30.9% of vehicles traded in for new cars in the first half of this year were in a state of negative equity.
In this case, the shortfall from the previous vehicle is rolled into the new auto loan, increasing the loan size and trapping buyers in a vicious cycle of long-term debt.
Edmunds advised that to avoid such situations, buyers should prepare a down payment of about 10 to 15% of the vehicle’s price. Furthermore, if your current auto loan balance exceeds your car’s value, it is financially more advantageous to hold onto the vehicle for a bit longer and pay down the principal rather than rushing to replace it.
