Post-graduation is one of the busiest times for car-buying. I know it's summer, but there's some homework you must do before hitting the car lot.
Recent high school graduate Josh Critzer of Eden Prairie, Minn., was fortunate enough to learn about car-buying basics in a school personal finance class -- and lucky enough to have parents willing to help him with the purchase.
But if you need a crash course on car finance, here are some tips to take with you to the car dealer and the bank.
Map your budget. Josh, 18, didn't contribute much to the purchase of his 2000 Ford Explorer, but his arrangement with his parents requires him to pay for insurance and gas and to set aside money for repairs and his insurance deductible. He ran the numbers and decided he needs $40 a week for gas and about half that for insurance. Then he sticks "maybe $40 to $50 per month" in his emergency savings account -- money he earns working at OfficeMax -- for repairs and in case he has to pay the insurance deductible.
Good thing he saved from the get-go. His first car, a Ford Taurus, was totaled and he had to pay the $500 deductible to settle, using all his emergency savings and some discretionary money. "I learned a valuable lesson," he said.
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If you're paying for the car yourself, figure out how much you truly can afford each month -- including insurance, maintenance, license-plate fees and gasoline on a really expensive day -- and don't exceed that amount. After all, a car depreciates as soon as you drive it away, and there is no law guaranteeing a return, although Scott Lambert of the Minnesota Auto Dealers Association said many dealers have return policies and are willing to make accommodations for unhappy customers.
Down the road, if it turns out you can't afford the car you picked, you may find you owe more to your lender than the car is worth.
You need a car, not a status symbol. Dwayne Emmel, a financial counselor at the Village Family Service Center, which has locations in Minnesota and North Dakota, tells students in his car-buying course to think through what kind of car they actually need before they start to shop.
"America is in love with vehicles," he said. Consumers should be "looking for a car that fits into their lifestyle and their budget."
For a young person, that might be a reliable car that gets good mileage for commuting to work, or a used van with plenty of room to haul your stuff to and from college. Save the sports car for a midlife crisis.
Shop around for more than the car. A lot of emphasis is placed on test-driving multiple vehicles and taking used vehicles to a mechanic for inspection. Checking a used car's history by pulling a report through a company such as Carfax.com is a good idea too, especially after Hurricane Katrina blew a lot of soaked vehicles onto the market.
However, it's also important to test-drive insurance policies and financing packages before signing a purchase agreement. Insurance costs vary widely for different vehicles and drivers (sorry, guys younger than 25). Call around for quotes before you fall in love with a particular car.
For financing, first pull your free credit report at www.annualcreditreport.com and consider a co-signer if your credit's not great.
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Next, Emmel suggests prequalifying for a loan through your bank or credit union before checking interest rates at the car dealership. Josh said his parents were going to finance his car through the dealership, but called a bank at his urging and got a much lower rate. But don't just reject the idea of dealer financing; some automakers have programs offering favorable rates to first-time car buyers, or they may be running a great low interest rate deal.
Trish Wexler, spokeswoman for Americans Well-Informed on Automobile Retailing Economics, or AWARE, an education campaign paid for by the auto industry, said that no matter where you get your loan or your car, the key to getting a good deal, especially for young people, is to be prepared. If you "go in with a folder, look like you know what you're doing, know your language and be prepared to negotiate financing, people are going to have to take you seriously."
Learn the lingo, research leasing versus buying, create a budget and more using various resources online:
* AWARE's site has many helpful articles: www.autofinancing101.org
* The Minnesota attorney general has a thorough car-buying handbook: www.ag.state.mn.us/Consumer/Cars/CarHandbook
* Edmunds.com has a Young Driver's Handbook: www.edmunds.com/youngdriver . Edmunds also has a number of free car-buying calculators.
Kara McGuire writes about personal finance for McClatchy Newspapers. Write to her at kara@startribune.com .
