3 First-Time Car Buyer Mistakes That Can Cost You

If this is the first time you’ve ever bought a car on your own, congratulations. It’s exciting and can be an awesome experience if you make sure to do things the right way. Unfortunately, there are some car dealers that love to prey on new soldiers and try and take advantage of your hard-earned cash by roping you into a crappy deal.

In this guide, we want to look at three of the biggest mistakes you can make when buying a car. Even if you’re buying through a reputable dealer, you might still make mistakes that could cost you a lot of money right away or down the line.

Cockpit view of a new car

1. Not Understanding What APR and Interest Rate Mean

When you buy a car, you’re most likely going to take out a loan to pay for that car. A bank, credit union, or the dealership is going to lend you the money to buy the car. While this is awesome and gets you behind the wheel right away, there is a cost to that borrowing. This is how the lender makes their money.

The two terms you need to understand are interest rate and APR. Interest rate is the percentage cost of borrowing the money. For example, if someone lends you $10 and they charge you $1 for that loan, that’s an interest charge. $1 is 10% of $10, which means your interest rate on that loan is 10%. That’s your direct cost of borrowing that money.

But let’s say your friend lends you that money and charges you the 10% interest, but they also want you to cover the costs of their gas money to drive the money to you. Let’s say that’s another $1. Your interest rate is still 10%, but you now have to pay another fee. The ACTUAL cost of borrowing that money is $2 or 20%.

APR is the annual percentage rate. This is the number that looks at the ACTUAL cost of borrowing. It INCLUDES the interest costs as well as any other fees or costs of borrowing. Your APR is always going to be higher than your interest rate because it includes those costs plus the fee. This is the real number you want to look at when you’re buying a car.

Understanding these terms is the first step of the process. Understanding the effect on how much you pay is even more important. This plays into the next mistake we’re going to talk about.

2. Only Looking at Your Monthly Payment

A popular car dealer trick is to get you to only look at your monthly payment. By getting you to ignore the total amount of money you’ll pay over the life of the loan, it can make a car seem more attractive.

They’ll say, “I can get you in this car for $600 a month. Does that work for you?”

And you think, well, I can afford $600 a month so I can afford this car! Unfortunately, this line of thinking is falling victim to the sales tactic. What they’re not telling you is that they’ve extended how long you have to pay for and jacked up the APR with interest and fees. So, while they are telling the truth about the size of your payment, they’re neglecting to point out just how long you’re going to be paying for that car.

Here’s an example. Let’s say you live in Georgia, maybe down at lovely Ft. Benning or whatever they end up deciding to call it. You just left Main Post and headed over to the Dodge dealer. The guy comes out and says he can get you into a new Charger for only $639 a month with a $2,500 down payment!

While this might sound okay, it’s not looking at the price you’re paying for the car or how much you’re going to pay in interest. You see, what the dealer did was extend your payments out to 6 years and jack the interest rate up to 20%. But they’re hoping you’ll ignore all of this and just jump at the monthly payment.

In this example, the price of the car we used was $27,000. Is that a fair price? Probably not. You should be prepared to negotiate down to a lower price for the car. This should be done before any of the financing talk begins.

Additionally, you’re now going to be paying on this car for 6 years. Is it still going to be as fun paying $634 a month on an older car in 5 or 6 years?

And lastly, the lender let you borrow $27,000 (minus your down payment) to get this car. Are you going to be paying them back $27,000? Nope. You’ll be paying back over $46,000 over the next 6 years! Why? It’s because the dealer jacked up the interest and APR and extended the length of the loan to make one number work for you.

Suddenly, this might not seem like such a good deal, and you’d be right. This is a tactic that dealers use to get people into new cars that they really can’t afford. Which brings us to our next point…

3. Buying a Car You Can’t Afford

This is the most painful thing for a leader to see when someone comes back with a new car they’re excited about but can’t afford. Is the car awesome? Probably. But it’s going to get less awesome when it wrecks your finances and you can’t afford to keep making payments or do anything else in life.

There are a lot of rules and ideas out there about how much car you can afford. While these aren’t perfect, they’re a great starting point.

The 25% Rule

The idea here is that you should never spend more than 25% of your gross income on all of your debt combined. Let’s break this down. Gross income is just a fancy phrase that means your money before taxes. The first step is to figure out what that amount is. You can find it online at military pay charts, or in your LES. Remember, it’s the number BEFORE taxes are taken out.

For an E1 with less than 2 years in service, your base pay in 2020 is $1,732 a month.

According to this rule, your total debt payments should not be more than 25% of this number. If you figure 25% of $1,732, you get $433. This is the total you should spend on debt.

So, how much can you afford on a car payment? Well, take that number and subtract out any debt that you have. This could be credit card payments, other car payments, subscriptions, cell phone payments, other debts, etc. Let’s say you have a $120 a month credit card bill, a $50 cell phone bill, $45 internet bill, and you spend $60 a month on video game subscriptions. $433 – $120 -$50 – $45 – $60 = $158.

The absolute max you should spend on a monthly car payment should be $158 under this rule. And remember, you need to make sure you’re not just getting to this payment by extending out the loan and paying a ton of interest over a long period of time. It’s a give and take.

The Bottom Line Not Upfront

A car is a major purchase. It can be easy to get excited about flashy new cars and let a salesperson talk you into something you can’t afford. Before you go to a dealer, figure out what you can afford. Do some research and look for cars that fit that bill.

From there, you can start shopping around. Take. Your. Time. There’s no reason you have to buy a car day one. And one last thing—take advantage of older soldiers or your chain of command that have experience here. You can learn from their mistakes and have a much better car-buying experience. This is going to sound cheesy, but someone who has their finances together and their life in order is much cooler than someone rolling around in a ride they clearly can’t afford.