Car Shopping for Recent Grads

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By Dan Strumpf, AP Auto Writer

NEW YORK (AP) — Many college grads will need a new car to start their lives off campus. A dismal job market could make financing such a big-ticket purchase a challenge.

The recession has been tough on young people, with unemployment for 20 to 24-year-olds at 17.2% in April. That's much higher than the rate of 9.9% for the entire population, according to data from the Bureau of Labor Statistics.

But buying a car might be an expense recent college grads can't skip over. Here are some tips to help navigate the perils of car shopping.

Check credit

For someone fresh out of college, buying an affordable car that is paid off on time is an excellent way to build credit. That will help down the road with buying a house, a more expensive car, starting a business or anything else that requires borrowing.

Before setting out for the dealership, it's a good idea for a buyer to check their credit history. This gives a car buyer the same information lenders use when they decide whether to give a car loan. Each of the three credit agencies, Experian, TransUnion and Equifax, allows one free credit report per year through their web sites.

Shoppers just out of school aren't likely to have serious black marks on their credit. The bigger obstacle is more likely to be a short credit history, says Eric Hoffman, spokesman for Americans Well-Informed on Auto Retailing Economics, a group that represents automotive lenders and dealerships.

That means recent grads shopping for a car should be prepared to pay a higher interest rate or a bigger down payment to satisfy nervous lenders, who may also require a parent to co-sign.

"I would encourage people to have a few thousand dollars" set aside for a down payment, he says.

For many young people this will also be the first time they've looked at their credit report. It's an opportunity to make sure it's error free, even if there isn't much there yet.

Set a budget

First-time car buyers will want to come up with a firm budget before setting foot in a dealership, where sales staff are likely to try to sell unnecessary add-ons and options.

A good benchmark: Young car owners should plan to spend no more than 15% of their monthly income for car payments, says Greg McBride, senior financial analyst at Bankrate.com. Of course, the less they spend, the more they can stash in savings.

"If you're 23 years old and you're just out of school, you don't need a $500 car payment blowing a hole in your monthly budget," McBride says. "There are a lot of savings needs that you have when you're just starting out."

Several web sites feature calculators that allow buyers to plug in a car's price, down payment and interest rate and compute a monthly payment. Start with Cars.com or Autofinancing101.org.

Buy, don't lease — usually

For recent grads, buying is the way to go in most cases.

Buying allows them to put equity into something they'll eventually own, and most cars built today are of high enough quality to last well beyond the life of a loan.

Leasing can be dicey for recent grads because, while the monthly payments may be cheaper, most arrangements charge a fee for breaking the lease early. For young people facing a difficult job market, that's not an appealing prospect, says Patrick Olsen, editor in chief of Cars.com.

Olsen suggests buying a dependable, late-model used car. The payments will be smaller than something new and someone else will have taken the initial depreciation cost.

There might be a few circumstances, however, where a cheap lease makes sense. One benefit of leasing is it's usually cheaper and doesn't require a down payment. For recent grads who absolutely need a car but don't have the cash for a down payment, a short lease can buy time to save money or secure a better-paying job, McBride says.

Shop around

Recent grads should shop around not just for the car they like, but for the financing plan they'll use to pay for it.

Karl Brauer, editor in chief of the automotive website Edmunds.com, suggests going to a bank or credit union first. The shopper should explain which car they're looking to buy and get an offer for a loan. They should take that offer to several dealerships and negotiate.

"If you can have multiple dealers that you're talking to and get them to play off each other, that could be a real benefit," Brauer says.

First-time buyers who find the haggling process intimidating can do the bulk of their shopping online. Most dealership Web sites allow shoppers to correspond with sales staff via e-mail.

In addition, keep an eye out for incentives aimed at college grads, most of which are good for up to two years after graduation.

Toyota will throw in $1,000 cash for buying a Corolla, while Honda offers 1.9% APR for 60 months for Civic buyers — though keep in mind that buyers have to qualify for APR deals, so they may not be a sure thing.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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