Today we’ve got a super informative post from Tom from FIRED Up Millenial.
Tom is about to share his journey about buying his first car, his regrets and some valuable information about how he’s recovering from this experience.
Tom is a 20-something engineer blogging about financial independence, retiring early and achieving financial independence by age 35.
Ever since I was a little kid staring out the backseat window of my parents’ car, I dreamed of life on the open road with my own vehicle and buying my first car . Automotive magazines, Need for Speed, and racing my bike were the only taste I could find until I could afford my own car.
Even through my college years and the beginning part of my career, I postponed buying my first car until I thought I could afford it. I waited and waited for the day I could walk into a dealership and drive away in my new car. That day came about one year after my graduation.
Life is a humbling experience for most of us, and the experience of buying my first car was no exception.
In hindsight, I was young and naïve when it came to automotive financing. I’m sure the salesman had me pegged from a mile away, and I’m not the first person to make a bad call on a car loan.
Don’t misunderstand – I love the open road and the freedom of owning my own car – I just wish I did my research and learned a thing or two about financing before I charged into the showroom, eyes wide and eager to walk away – no drive away – in a new car.
Hopefully, others can use my bad experience as a warning and a lesson so they don’t fall for the same mistakes I did.
The experience of buying my first car
Compound interest is a powerful thing, especially if you don’t understand it.
The impact of a long-term loan and high-interest rate didn’t cross my mind in the dealership financing office. All I wanted was the keys and a full tank of gas to hit the road.
My loan wasn’t crazy – only $17,000. Unfortunately, I didn’t really shop around for a good deal and ended up paying around 9 percent interest APR. I didn’t even know what APR was, so the rate didn’t really bother me much at the time. I signed up for a 60 month loan with a $353 monthly payment. Since I was making decent money at my job, the car seemed like a no-brainer.
My first car was ready to go, and I was off to the races!
The finance guy at the dealership tried to explain the financing agreement and how the loan worked. He talked a lot about my bad credit from missed credit card payments in college, and a five-year loan seemed like the best deal because it was the lowest payment he offered.
Five years didn’t seem too long since my undergrad took that long and it went by in a blink! In hindsight, I wish I’d read the fine print on the loan. The dealer talked me into all sorts of complicated stuff like GAP insurance, extended warranties, and credit insurance. I was so anxious to get out of there, but I wish I asked more questions before I signed the dotted line.
Buying my first car: the realization of my situation
After a year, I was surprised to see how little the outstanding balance went down. A big chunk of my $353 payment went to interest, and that 60-month term felt longer and longer. I calculated the total interest that I would end paying over the life of my auto loan and – to my demise – realized that I would end up paying over $4,000 in interest.
This really freaked me out. I immediately started venting to friends and colleagues and researching my options.
Buying my first car: the solution
One of my friends heard me complaining about my car payments, and she told me about refinancing. I’d never considered that I could get out of my expensive car loan. My friend explained that my credit was probably better after making consistent monthly payments and earning a promotion at my job. She also had just refinanced her car loan and was hoping to save almost $2,500 on the financing. I didn’t think it would work for me, but I visited the bank to see what I could do. It was the best car decision I made yet.
The bank helped me put together a refinancing package to get a better rate on the loan. I learned my lesson the hard way, but I was determined to get it right this time.
After listening to the advice of the banker and seeing my new credit report, I decided to go with a shorter term to save on interest. Paying off my car a year sooner meant a higher monthly payment, but as is the case with most auto loan refinances, my interest rate was so much better – only 3.6 percent!
I ended up saving almost $2,000 on the total cost of owning the car and I am all set to pay it off a few years earlier than originally planned. The dealership dinged me for a sneaky prepayment penalty, but I was still way ahead of the game compared to my old loan.
Last Word On Car-Buying
Buying a car is a great feeling. After spending hundreds of hours on the bus, on my bike, and on my feet, it was the right time to become an adult with my own car. If I’d only known a few things about credit history, hidden fees, and auto financing, I wouldn’t have ever signed up for that first loan.
Don’t be like me. Do your homework to avoid overpaying for your next ride.
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I want to hear from you!
What was your first car buying experience like?