There’s nothing quite like the smell of a new car — whether that car is brand new or just new to you. But along with that lovely smell comes a sometimes not-so-lovely experience with the dealership’s finance-and-insurance department.
You might have to sit in a stuffy office for what seems like weeks while you undergo credit checks and other not-so-fun stuff to determine if you’re worthy of a car loan.
And once you have an idea of the loan you can expect, you then have to negotiate with the F&I manager to get the best deal based on your credit.
Seriously, buying a car can be exhausting and stressful. It’s no wonder so many people put it off and continue driving their old and increasingly crappy rides.
If you’re in the market for a new ride, make sure you’re prepared for the financial stuff beforehand. Here’s what you need to know.
Determine Your Budget
Before you set foot inside a dealership, you need to know how much you can afford to spend on your new car.
DMV.org explains that a good rule of thumb is to spend no more than 15% of your monthly income on your car payment. And even that depends on how many other expenses you have per month. If you’re still paying off student loans or trying to launch your emergency savings, you’re better off spending less than 15% of your income on a car.
Your monthly payment will be lower if you can afford to shell out a large down payment. DMV.org reports you’re also more likely to get a good interest rate if you make a larger down payment.
The other thing you’ll need to know is your credit score. According to Bankrate.com, borrowers with a credit score is between 781 and 850 get an average annual percentage rate of 2.6% on their new-car loan. If they go used, they can expect an average rate of 3.4%.
As you might expect, that percentage increases with a lower credit score. The average buyer with a 661 to 780 credit score can expect a rate around 3.59% on a new-car loan. That average rate increases to 6.39% with a 601 to 660 credit score, and to 13.53% with a 300 to 500 credit score.
Once you know your budget and credit score, it’s time to contact your bank about loan options. While you might be able to get a better deal from the dealership’s F&I office, having a preapproval letter from your bank will help expedite the process of buying your car, since you’ll better understand what you can afford and what you’re looking for. This also gives you the upper hand because you can negotiate the car’s price as a cash buyer and have ammunition to help negotiate your loan.
Documents You’ll Need
By now, you probably know how much you can spend on your next car, and you might even have your eye on a specific vehicle. But what should you bring with you when you visit the dealership? Lending Tree lists five documents you need to have with you if you’re ready to drive home in a new car.
Proof of Income
That could be as simple as pay stubs from your employer or tax returns if you’re self-employed. Generally speaking, it’s better to be overprepared than underprepared, so if you think you might need it, bring it with you.
Credit and Banking History
If you have any documentation about your credit or banking history, bring that with you The dealership will run your credit before looking into your loan options, but these documents
can be helpful when filling out paperwork or as proof to the bank. This includes credit card statements, lease or mortgage agreements, bank statements and alimony or child support records.
Proof of Residence
The bank sometimes needs to verify you live where you claim you do, so bring some proof of residence. This can be a bill, bank statement or other form of mail that includes your address. It needs to be current, so stick with documents sent within the last month.
Vehicle Information
It’s 2017, so there’s a good chance you know exactly what vehicle you want before you even step into the dealership. Between google searches, reading reviews and checking out prices, today’s buyers are more aware than ever when it comes to knowing what they want.
Write down all the important information about the vehicle you want, such as purchase price, vehicle identification number and stock number, and bring it with you. You can usually find this information on the dealership’s website.
Proof of Insurance
Finally, you need to prove you have car insurance before driving away in your new car. You can contact your insurance company from the dealership and let them know about your new car purchase — you can likely even get proof of insurance instantly using your insurance company’s app.
Terms You Should Know
Dealerships and their F&I offices are full of confusing acronyms and terms that you probably don’t hear in everyday life. Here are a few of the most common ones you’ll encounter:
Manufacturer’s Suggested Retail Price
This is the price that the automaker determines for the vehicle. The dealership’s price could be more or less than MSRP, depending on the level of demand for the model and any special offers from the manufacturer or the dealer.
Sticker Price
The sticker price of a car refers to the price that appears on a new car’s window sticker, which also referred to as the Monroney sticker. Federal law requires all new cars to have this sticker, which lists the car’s base MSRP, the price of any installed options, the destination charge and the fuel economy rating of the car.
You may also find an addendum sticker near the Monroney, which could include any dealer-added options or pricing adjustments due to demand.
Invoice Price
A car’s invoice price refers to the amount the dealer paid the manufacturer for the vehicle. Invoice price includes the destination charge, which is typically excluded from MSRP. Note that the invoice price might not reflect the actual price the dealer paid; manufacturers often give dealers rebates and other incentives not reflected by the invoice price.
Destination Charge
This is the price the manufacturer has set to cover the cost to ship the vehicle from the factory to the dealership. You can usually find this information in the disclaimers on the manufacturer’s website. Add this charge to the MSRP to figure out the total pre-tax amount you’ll pay for the car.
Annual Percentage Rate
APR is the amount it costs you to borrow money from a lender. This number includes the interest rate and any fees associated with lending you money for the life of the loan. As previously mentioned, your APR will likely be higher if you have bad credit and lower if you have good credit.
Extended Warranty
Chances are your F&I manager will try to talk you into buying an extended warranty. They’ll probably make it seem like a fantastic idea, but it can drive up your monthly payment and might not be in your best interest.
My husband got one for his car, which we bought a few years back, but we never used it, so I declined it when we bought my car last year. It’s completely up to you whether you opt for the extended warranty or not. New cars come with factory warranties, but these extended plans can give you peace of mind if you plan to hang onto the car for a while.
Prepayment Penalty
This is an important one to know, especially if you expect to pay off your loan early. For example, I want to get my loan paid off as quickly as possible, so I throw any extra money I can at it, including tax returns, bonuses or money I make freelancing.
But some lenders charge you for doing this. Be sure to ask your dealer if the loan they’re proposing includes this penalty. If so, consider using another lender if this might be an issue for you.
Trade-In Value
The trade-in value is the amount the dealer will give you for trading in your current car. You can use this amount to put toward your new car as a down payment. Keep in mind, though, if your car has a loan on it, the dealer will send the payoff amount to the lender and apply the difference to your new car.
If your trade-in car is financed or leased, contact your lender to find out what your payoff amount is before going to the dealer.
Buying a car can be a stressful experience. Rather than winging it when you need to buy a new car, arm yourself with the knowledge you need to make a smart decision. You’ll find the process less intimidating and more enjoyable overall if you know what to expect throughout.
Catherine Hiles has bought three new cars in her lifetime, and also some not-so-new beaters. Her favorite and most infuriating was an old Jeep Wrangler that was fun to drive but not so fun to repair.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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