PORTLAND, Maine — Two of the largest purchases we make in our lifetimes are automobiles and homes. Right now, interest rates are low and car dealerships are promoting deals; but its easy to get in over your head when financing. Brenda Pollock, a financial counselor with Evergreen Credit Union, offers up some advice before buying.
Let’s begin with buying a car. It’s a major investment. What do you recommend people who are in the market for a new vehicle should do?
First and foremost, DO YOUR RESEARCH. Knowledge is power. It’s a mistake to arrive at a car lot without first researching the car you want to buy. You can find out just about anything you want to know about a car online. Edmunds.com, Consumer Reports, and Kelley Blue Book are great places to start researching cars in your price range.
In your price range? How do determine what your price range is?
It’s a good rule of thumb to take your annual salary. Let’s say you earn $40,000 a year. Your auto payment, insurance, maintenance, added together should be no more than 10% of your salary. All inclusive, that’s about $333 per month you should budget for.
What if you want to buy a new car versus used, do you have any tips for someone in the market for a new car?
If you are considering buying a new car, there are a couple things to consider. The COVID-19 crisis has caused a shortage in new inventory; you may not be able to find the exact vehicle with the exact package you’re looking for due to the lack of available inventory.
Second, your goal is to find the “invoice” price of the car, not the MSRP. The “invoice” price is what the dealer paid the manufacturer for the car. Because the market is RED HOT, it may be more difficult to negotiate a super deal for that new vehicle.
FYI - MSRP stands for manufacturer's suggested retail price. As the name implies, it is the price that the manufacturer sets and recommends that a dealership charge for its vehicles. MSRP is often cited in many advertisements and vehicle reviews. Manufacturers ship vehicles with invoices, which are the bills from the manufacturer to the dealer for each vehicle. Since the dealership will have to pay that amount for the vehicle, generally anything over that will be a profit.
So, are you saying it’s best to be shopping for a used vehicle right now?
I am always an advocate of looking for the best savings and used vehicles are a great option. There is a lot of inventory of good used vehicles that can offer you the car you’re looking for while staying on budget.
If your heart is set on a specific vehicle with a certain accessory package, looking for a used vehicle is a great way to go. There is a large inventory of used vehicles On the other hand, if you are thinking about buying a used car, research the recent resale prices for that specific car model. This data will give you major bargaining power. If you plan to trade in your current car, research market values for your vehicle, too.
You recommend LOOKING TO SMALL BANKS OR CREDIT UNIONS FOR BEST RATES and lock in a Pre-financing Options before you go shopping at a car dealership.
Many people obtain financing from the car dealership, but this isn’t fiscally responsible. Dealership interest rates are typically much higher than loan rates obtained from banks and credit unions. Your bank or credit union is one of the best places to start researching car loan rates, and you can obtain “relationship discounts” that you won’t find anywhere else.
Finally, once you obtain a quote from any financial institution, get the quote in writing. You can then present this quote to the dealership and use it as leverage to negotiate a lower interest rate.
It may be better for your credit score if before you’re shopping, to get that pre-approval and only have one hard pull on your credit score?
A hard pull on your credit score stays on your report for 2 years. It can impact your score up to 10 points if you do have too many hard pulls in a 12-month period.
PURCHASING A HOME DURING THIS PANDEMIC
The other big loan you will make in your life is a home. What are some of the things people should know or do before considering buying a home?
Homeownership is still very much alive and a big part of the American dream. Although home sales dropped in Maine last month over previous years number, in part due to COVID-19 and the lack of inventory.
If someone is considering buying a home, now is a great time because the current interest rates for financing or refinancing a home are so low.
What are some of the tips you recommend for someone who wants to buy a home?
1. Pay Off All Debt and Build an Emergency Fund
2. Determine How Much House You Can Afford
3. Save a Down Payment
4. Save for Closing Costs
Should anyone looking to purchase a new home get a pre-approval first before looking?
While you may already have an idea of what you can afford, you'll need to find out how the bank sees you. A mortgage broker will assess your income, assets, and credit to determine your maximum loan amount.
Because a loan pre-approval holds more heft than a loan pre-qualification, it'll take more work to get one. It requires a number of documents from each applicant (so if you're married, both you and your spouse will need to provide these items):
• Pay stubs for one-month period
• Bank statements, both checking and savings, for two-month period
• Income tax returns for two-year period
• W-2s for two-year period
During pre-approval, the lender will also do a hard inquiry of your credit, which will show up on your credit report. Once you're pre-approved, you'll receive a conditional letter stating the amount you've been approved for.
Because of the low inventory, it’s best to be prepared if you hope to have an offer accepted.
Absolutely. In May 2020, a listing was on the market an average of 17 days, that down from the average of 24 days in April. The more you’re organized, and financially prepared for homeownership, the more competitive offer (That’s Within Your Budget) you’ll be able to make.