

By Dan Rafter on 13 July 2016 1 comment

The beater you are driving now spends more time in the repair shop than on the highway. Or maybe you're sick of trying to time bus schedules or schedule Uber rides. Whatever the reason, it's time to upgrade to a new set of wheels.

Unfortunately for most people, a new car comes with a new monthly auto loan payment. And these payments can be high. Kelley Blue Book reported that the estimated average transaction price for new cars hit $33,845 in May 2016. That's an increase of 3.5% from the same month in 2015.

Fortunately, you can prepare for this added cost, and all it takes is a bit of research and planning on your part. Here are six money moves to make the instant you decide to buy a new car.

1. Check Your Credit Reports

You want an auto loan with the lowest possible interest rate, so that your monthly payment is as small as possible. And of course, you'll qualify for lower rates if you have strong credit.

But before you start shopping for a new car, check your three credit reports (one each maintained by the national credit bureaus of Experian, Equifax, and TransUnion). You can order one copy of each of your reports free from AnnualCreditReport.com. Check carefully for any mistakes — fixing a mistake could immediately improve your FICO credit score.

Knowing the information that the credit bureaus have on you and what your credit score is will give you an idea of whether you can qualify for a low interest rate now, or whether you should work to improve your score before you start hunting for a new car.

2. Call Your Insurance Company

If you are ditching an old car and upgrading to a new one, your auto insurance premium might rise. If you are buying a car for the first time, you'll need to purchase auto insurance before you can hit the road. And you'll need to know, for budgeting reasons, just how much you might expect to pay in auto insurance premiums.

Your premium will vary depending on a host of factors, including everything from your age and driving record to the type of car you buy and where you live. So call either your current insurance agent or, if you aren't yet driving, an insurer licensed to do business in your area to get at least an estimate of how much you'll be paying each month or year in insurance costs.

3. Tweak Your Household Budget

You should have a household budget that you follow each month. Adding a new car payment means that you need to tweak that budget. Study your current budget to determine how much of a car payment you can afford. When you start shopping for cars, don't look at any that will leave you with a monthly payment that exceeds that amount. Having a new car is fun. Having a new car that you can't afford is not.

4. Pre-Apply for Financing

When you buy a new car, the dealer will offer you its own financing plan, meaning that you can take out a car loan directly from the dealership that is selling you your vehicle. But the smarter move is to go to your dealership with a preapproval letter from an outside lender.

A preapproval letter states that a lender is willing to provide you with an auto loan. The letter will also state exactly how much money this outside lender is willing to loan you.

It's good to have another loan option when you're at the dealership. The dealer will still want you to take out a loan from its own finance department, so the dealer might offer you a loan with slightly better terms, including a lower interest rate, as a way to compete. And if your dealer can't come up with a better offer? You can simply finalize that loan from the outside lender.

5. Gather Money for a Down Payment

You'll want to come up with the largest down payment possible when financing a new car. The more cash you provide upfront, the smaller your auto loan will be. And a smaller loan means lower monthly payments.

So before shopping for a car, spend some time saving. It's long been recommended that consumers come up with a down payment of 20% of their car's final purchase price. For a car costing $25,000, that comes out to a down payment of $5,000. However, a smaller number of buyers today are actually providing that 20% down. Edmunds reports that consumers in 2015 provided an average down payment of just 10.5% of their car's final purchase price.

Don't be one of those consumers who skimps on the down payment. Wait to buy until you've saved up enough cash for a bigger one.

6. Build an Emergency Fund

New cars come with a host of new expenses in addition to that monthly car payment. You'll face insurance costs, gas prices, and repair and maintenance bills. AAA estimates that the annual cost of owning and operating a vehicle in the United States is $8,558. That is actually a six-year low, but shows that owning a car is far from cheap.

Make sure that you can afford these extra costs by building an emergency fund before you start car shopping. It's a sounder financial strategy than paying for such unforeseen events as car repairs or emergency home repairs with a credit card.

What steps do you take when it's time for a new car?

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Adeem Zafar

I am just curious but from the start the article assumes auto financing or leasing. Wouldn't the best money move be to pay cash for the car?