How To Buy Your First Car

March 4, 2015

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Written by imoney

So you’ve had enough of your jeep/bus/MRT commute and you think you’re ready to buy your first car. Congratulations! A car can give you a lot of freedom. But like Spider-Man’s Uncle Ben almost said, it also comes with great responsibility. Because of this, the car-buying experience can fill you with doubt and fear. For the newbie, buying a new car might seem like the most intimidating purchase you’ll ever make.

To help you out, we’ve compiled some tips on how to buy your first car. These tips can help you get financially ready for this next, car-owning phase of your life:

Find the car for your needs and budget.

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Somewhere out there is the car for you.

Assess your car needs while staying realistic to your financial situation. If you’re going to be doing mostly solo city driving and you can only afford payments for a P700,000 car, it makes no sense to consider, say, an Audi Q5 compact luxury crossover SUV (P2–3 million) rather than a more sensible, supermini Ford Fiesta (P698,000).

When considering a car, you have to think about your needs now and your needs in the future, because the car you choose should serve you well for a long time. Edmunds.com, a third-party automotive website, recommends that you keep these concerns in mind:

How many passengers do you need to carry?
What type of driving do you do: highway, surface streets, off-road?
Do you have a long commute and, because of that, is fuel economy important to you?
Do you need all-wheel drive?
What safety features are important to you?
Do you need a lot of cargo capacity?
Will you be using children’s car seats?
Will you be doing any towing?
How much garage or parking space do you have?

Do your research online to find the cars that meet your needs. Read reviews in car magazines and publications. Research the makes and models you’re considering so that you can go to the dealership armed with information. This will make it easier for you to stick to what you really need, and you won’t be easily swayed by a persuasive speech for a model that’s out of your price range.

Shop around and compare auto loan options online.

If you’re not paying for your new car in cash, you should know your loan options before you even consider in-house financing. Our car loan comparison tool can show you the interest rates, total interest you’ll pay over the loan period, and the monthly repayment for a certain loan amount. And to save you time, it compares all the banks at once so you can make the best decision at a glance.

Here’s what you can expect from banks:

Minimum downpayment: 20%. This means that a bank will finance a maximum of 80% of the price of your car. So if the car you want is P700,000, you’ll have to come up with the P140,000 downpayment, and the bank will finance the remaining P560,000, which will then be the principal of your car loan. If you can afford to make a bigger downpayment, this will reduce the loan you’ll need to borrow from the bank, and you’ll pay less in interest.
Loan tenure: 12 – 60 months. Of course, the longer the loan is, the more interest you’ll have to pay in total. At one bank, a 48-month loan has an add-on interest rate of 27.7%, while a 60-month loan has an add-on interest rate of 36.1%. We’ll explore this more in the next section.

Get the shortest loan term you can afford — and make early or extra payments when you can.

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Shorter loans = good.

The shorter you can make your loan term, the less you’ll pay in interest. Let’s say you want the Hyundai Elantra 1.6 GL AT (P888,000 — to make things simpler we won’t include everything in this calculation). At a 20% downpayment and a 60-month term, you could pay up to P352,714 in interest. Shorten that to 48 months, and you’ll only pay P270,804. You could save P81,910 simply by paying P2,723 more every month for a shorter period of time!

Looking for more ways to save? Some banks will even give you lower interest rates when you make payments one month in advance. For example, paying one month in advance on a 48-month term can reduce the 27.7% add-on rate to only 26.5%. That’s a savings of P6,720 just by paying early. You can even get rebates when you make a payment beyond the required amortization, which will pay down your debt faster and reduce the interest payments.

So if you can manage a larger monthly payment to make your total loan term shorter, or you can afford to make extra payments beyond the regular amortization every once in a while, go ahead and do it; it will save you a lot of money in the long run. Again, don’t forget to use our car loan comparison tool — play around with different loan terms and down payments until you hit the sweet spot you can afford.

Find the best car insurance rates.

Don’t limit yourself to in-house insurance from your dealer. Be smart and shop around for better insurance. iChoose can help you compare 6 different insurers in under 5 minutes so you can get an idea of how much insurance you’ll expect to pay. The advantage of using iChoose is that they can give you discounted rates from their partner companies.

For more ways to save on car insurance, check out these car insurance secrets that can save you thousands.

Don’t forget to test-drive.

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Just remember to drive it back to the dealership in one piece.

You’re going to be spending a lot of time in your new car. You’re also going to be spending hundreds of thousands on it. Why not get behind the wheel before you drop that kind of money on your purchase? If you know someone who owns the model you want, ask to take it for a spin. If not, check with the dealership.

“Pay attention to as many details as possible before turning the key, including ease of entry/exiting, seat comfort, leg- and headroom, outward visibility and how easy or complex dashboard controls are operated,” writes Jim Gorzelany for Forbes. And while driving, get a feel for the car: the steering, the turning radius, the handling, the braking, et cetera. If something about it doesn’t feel right, don’t just ignore it. “Niggling annoyances here can often blossom into full-scale grievances over time,” Gorzelany adds.

Learn the long-term costs of your car.

The price you pay for a car isn’t confined to the down payment and monthly installments. Make sure that you have room on your budget for these additional costs. According to Consumer Reports, here are the main costs you have to take into consideration:

Depreciation. The moment you drive your new car off the lot, it loses an average of 11% of its value immediately. If you’re not planning on reselling your car, and you just want to use it until the wheels fall off, depreciation has no effect on you. But if you’re planning on reselling it later, you need to think about the costs of depreciation. According to Edmunds, a car loses 15%-25% of its value every year in the first five years. So after five years, the car you bought could be worth as low as 37% of what you originally paid for it.
Fuel costs. This varies greatly depending on whether you make a lot of long trips or not, or if you car is very fuel-efficient or not. But if you got two full tanks of gas a month, expect to spend around P43,200 a year on gas.
Interest. In our Hyundai Elantra example in #3, you’d be paying P270,804 in interest over 48 months, or P67,701 a year.
Insurance. At the very least, expect to pay P12,000 a year for insurance, which could go up depending on the make and model of your car, among other factors.
Maintenance and repair costs. One trip to the dealership for routine maintenance could cost P6,000. This isn’t even including all the little things you’ll have to do to keep your car in tip-top shape, like pumping air into your tires, car washes, and others.
Other costs. Tolls, parking, registration, and other fees not included above will add to the cost of ownership of your car.

It may not be easy to buy a new car. You’ll have to make a lot of decisions and spend a good chunk of money. But if you do your research, know your options, and are wise about your budget, you’ll find the perfect car that will serve you well for years to come.