Car Buying Mistakes That Will Kill Your Finances in the Military

in Spend by Lacey Langford, AFC®

Buying your first car is a big moment. When you’re in the military, it’s often at your first duty station. It’s an exciting time but it can also be a stressful time especially if you have no car buying experience. There’s a lot to know. Once you get through the stressful time of buying a car, it’s not over. That first car isn’t going to last forever, you’ll need to buy another one at some point in your life. Because of that, car buying is a life-long skill you’ll need for financial success. Today’s What the Heck Wednesday is car buying mistakes that will kill your finances in the military.

Let me break down an all too common scenario of Service members buying a car. You walk into a car dealer and tell them the only payment you can afford is $350 a month but you want a Dodge Charger. Oh and you don’t have any money for a down payment. The dealer says “I’m not sure about that but let me go talk to my mysterious and never seen manager and see what we can do.” Then he disappears for a while leaving you to stare at his car selling awards hanging on the walls. He then returns with the great news that somehow they can make it happen. Yeah!

Not yeah.

What you don’t realize before you sign the bottom line is that it’s a huge financial mistake on multiple levels. The way they make any payment you say work is by extending the term of the loan and increasing your interest rate. Because the longer you have a car loan, the higher the interest rate is going to be. Instead of a reasonable 5 years or 60 months loan term, they’ll make it a 7-year loan. By increasing your loan length and the interest rate you’ll be paying more in interest and paying a lot more for the car. But paying too much for the car isn’t the only problem in this scenario. There is another one that Service members don’t see coming until it’s too late. It’s called negative equity.

What is Negative Equity?

I’m glad you asked, negative equity is when you owe more than the car is worth, a.k.a upside down or underwater. It depends on the car but most negative equity comes from not making a big enough down payment and having a long loan term. When you have negative equity on a car loan, it 100% limits your smart financial decision-making. You’re between a rock and a hard placeNow you’re locked into a 7-year loan on a car that is worth less than you owe on it and you can’t afford to make the payments. Because you can’t afford the payments and have been late or missing them, your credit score is damaged. You need to sell the car but you can’t because people aren’t going to buy an overpriced car. You may be wondering how in the world a person with bad credit and owes more than a car is worth could sell that car and get a new one? Here’s how. They roll the old upside down car payment into a new loan. This doesn’t make the problems of negative equity or affording payments go away. In fact, it makes the problem much worse. 

Here is what you should do instead to avoid car buying mistakes that will kill your finances in the military.

Do Your Car Homework

Do your research on potential vehicles, period. You can’t just go out there a wing it or you’ll make financial mistakes. You don’t know what you don’t know. Research the type of car you’re interested in. Check it’s safety ratings and reviews. Look up average prices for the ones you want. Find out how much the dealer paid for the car. You can use Consumer Reports to help research the price of vehicles. They show you a great price for the vehicle compared to an above market price to help you make informed car buying decisions.

Know Your Car Buying Budget

When you’re doing your homework you also want to consider your budget. How much can you afford to pay for a car? What car expenses will change? Know the average miles per gallon so you can budget for the gas expense. Get an insurance quote to find out if you’ll be able to afford the new car insurance. Find out the average price to replace the tires to add to your budget especially if you are getting a truck. You want to have a clear picture of what your budget will look like with your new car before you buy the car. Once you do the research and know how much your new car is going to cost, plus the new expenses that will come with the car you can make a new budget. Knowing your budget will help you stay on track when negotiating the price of the new car.  

Car Buying in the military

Get Vehicle Buying Help

Don’t be afraid to get help when buying a car. Start with the free car buying classes offered by financial services on your base or post. They’ll teach you the ins and outs of buying a car in the military. As an added bonus they know the local area and can help point you in the right direction and advise you on car buying places to avoid. Don’t forget to check the band list for your installation. You definitely want to avoid car dealers on that list. But you won’t know their on there unless you actually read it. Use free services provided by your bank. If you’re a USAA member, they have a car buying service to help you.

Buy at the Right Time

You do not want to rush into buying a car. You want to take your time and buy at the right time. Let me tell you when a horrible time to buy a car is. Over the internet when you’re in Afghanistan or the day after you return. You want to avoid making a big purchase when you’re going through a major transition. When you come back from a deployment you’re not in the right head space to buy a car. You have lots of extra cash in the bank and have been used to making more money each month. Often Service members buy vehicles right off deployment only to figure out later they can’t afford the payment. Wait and let your mind and finances adjust before you start making major purchases.

Negotiate the Vehicle Price

Don’t just walk into the dealer and pay the price on the sticker. You’ve done your homework and know what the dealer paid and what other people have been paying for the car. Use the knowledge to negotiate the lowest possible price for the car. You will be saving money in the long run but getting the price as low as possible. You don’t even have to step foot in a dealership to negotiate, you can do it all through email. It takes the pressure off of you when negotiating. Don’t forget to email multiple dealers in your city and the surrounding area. Having multiple dealers can help you get an even better price. Car buying mistakes that will kill your finances in the military can be avoided. The process doesn’t have to be stressful either. Arming yourself with knowledge will help you avoid all of that. Get help from your military financial readiness office. They give you the education you need to make smart financial decisions when buying a vehicle.