Buying That New Car
By David J. Haas CFP®
A few years ago when my son was in college, I gave him my old car to drive. This was a nice Honda Accord which I had bought new in 2005 and was about 8 years old when I gave it to my son. His college as 3 1/2 hours from home and my daughter was in another college 3 1/2 hours in a different direction, so it was really self-defense for both kids to have cars. Now, 4 years later, my son has a job and an apartment and uses this same old car to commute. The car is still reliable, but does need a little maintenance and my son is thinking about buying a new car. My son relies on his car and he has a good job with benefits and little other responsibility, so there is nothing wrong with him getting a new car. I want to help him, and he’s asking my advice! So I thought I would share my advice with everyone! Except for buying a house, buying a car is one of the priciest purchases you can make, so its definitely a subject that requires some financial advice.
Choosing the Right Car
Choosing the right car is very subjective. There’s practical needs, emotional needs, and aesthetic needs. Some people only care about a car as transportation. As long as the car gets you where you need to go, nothing else matters. For some, a car needs to be comfortable. For others a car needs to project the buyer’s personality or be beautiful to look at. For still others, the car is the manifestation of sophisticated technology and needs to go fast and look like it’s going fast! I happen to think a car is transportation, but I also want to be comfortable while I’m being transported. My son wants the car to fit his transportation needs, but also wants the car to be fun to drive. When my wife bought her last car, her only criteria was that the car had a place to put her purse not on the passenger seat or too far away. So how do you choose?
Make a List
You won’t be happy if you get a car which looks great and goes fast, but can’t fit your family or transport your dog or bottoms out on your driveway. So make a list of the most important transportation criteria and use this as a guide during your search.
Research
There is a lot of good information out there about cars, both new and used. I happen to think Consumer Reports is one of the best sources out there for car information. They have a lot of technical information on the cars and they drive every one. They collect information from their readers on reliability issues and even have a buying service to help you get a good price. Since they accept no advertising, their advice is unbiased, but you do have to take it with a grain of salt. Remember, their criteria are not necessarily your criteria. Reliability data is based on past experience and your car may or may not be as reliable as previous model years of the same car. Still, its a great place to get information.
Here’s a list of good places for car research:
- Consumer Reports
- Edmunds – Good reviews and information on new and used cars.
- Kelly Blue Book – Pricing estimator for used cars.
- Carsdirect.com – Great pricing and configuration tool for new cars. Also good car comparison tools.
- Truecar.com – Best pricing tool and best place to get quotes from local dealers.
What Car Can I Afford?
The first part of this question has to do with how much available cash you have. Financially, the best way to buy cars is to buy the car new with cash and keep it for a long time, preferably 10 years or more. This has a lot of advantages because you can get the best price on the new car, you don’t pay any interest and have full flexibility as to whether you want to keep the car or sell it. A car is a depreciating asset and it’s value does not depreciate in a straight line. New cars depreciate the most right when you drive them off the lot and they become used. They depreciate rapidly in the first couple of years of ownership and then depreciation slows. So keeping your car a long time means the rapid depreciation when the car is newer won’t matter to you. You’re in it for the long haul.
So how much car you can afford is obvious if you are paying cash, but a little less obvious if you borrow or lease your car because you don’t have $35,000 lying around. Then you have to work with a monthly payment and rule number 1 is don’t get into any deal over 5 years (or 60 months). If you do, you are likely to be underwater (where you actually owe more than the car is worth) for at least part of the deal. Sure your payments will be lower, but you are locked in for way too long. Make a realistic budget and include the car payments (remember car insurance and maintenance). You can compare your results with certain ratios. Try to keep your debt to income ratio (consumer credit payments including car payments divided by after-tax income) less than 15%. You should also be continuing to save 10% or more of your income. If your car payments cause your savings to go away, then you’re buying too much car.
If you find that you can’t buy the new car you want, then look into a used car. For as little as $2,000 you can probably get a used car that will take you from point A to point B and if you spend more you can actually get a nice car. Just remember that any used car will need some maintenance, so put that in the budget. If you buy a used car from a dealer, you might be able to get a 1 month to 6 month warranty, but you will definitely pay more than buying from a private party. Always get a Carfax report on any used car you buy. Most dealers will give that to you for free, just ask. For a private party purchase you will need to buy it (unless the previous owner gives it to you). The Carfax report will give you information on a car’s collision and repair history as well as when and where it was bought and when it changed hands.
Leasing vs. a Loan
When you buy a car with a loan, you are actually buying a car and will generally own more and more of it until you make that last payment when you finally own all of it. When you lease a car, you are actually renting it for a period of time. At the end of the lease, you may be allowed to buy the car at a preset price. Which is better depends a little on how long you plan to keep the car. If you really like a new car every 2 years and don’t mind not owning your car, then leasing can be a great way to go. You will always have the latest and greatest, but you will never be done with that payment. On the other hand, if you keep your car for 10 years and take a 48 month loan (which you can sometimes get for 0%), then you have 4 years of payments, followed by 6 years with no payments. With both the lease and a loan, you are responsible for any repairs or maintenance not covered by warranty. In the case of the lease, there is usually a preset number of miles you are allotted (often 12,000/yr) and if you drive more than that, you will be charged at the end of the lease.
Consumer reports has a very nice discussion on buying vs. leasing here: Consumer Reports: Buying vs. Leasing basics.
Getting the Best Deal
You’ve decided on a car and you’ve decided on how you’re going to pay for it. So how do you get the best deal? Do you lie awake at night because of your fear of car dealers? Well, just follow these tips and don’t worry.
Always Separate Price from All Other Factors
This tip works best when you are paying cash outright or are taking a loan. The car dealer will want to give you a price, based on how you’re paying and other factors like your trade-in. Resist this. Ask for a price assuming you are paying cash and not trading in your car. You can always tell them you’ve changed your mind and now want a loan and/or you want a price for your trade-in afterwards. The reason you want to do this is to get a simple single price for the car that you can compare using TrueCar or some other service which will tell you what’s a good price.
Arrange Financing Before Going Into The Dealership
The dealer might have great financing deals, but sometimes those great deals mean you actually pay more for the car. So shop around for a loan before going into the dealership and then see if the dealer can beat it after you’ve negotiated the price of your car. There are some online loan search engines and try calling some local banks to find the best rates. Also, check some of the websites listed above such as carsdirect.com and edmunds.com to see if they list any dealer loan or lease programs.
Use TrueCar.com and Edmunds.com to Get Email Price Quotes
Once you’re ready to buy use TrueCar.com and Edmunds.com to get email price quotes from local dealers. These price quotes often come from a special internet department from within the dealer. They know that you know what a good price is for your car, so they generally are going to give you their best quote. Ignore the dealers which won’t give you a straight quote. Sometimes, they just email you back with some vague promises. Go with the dealers that give you a hard quote for what YOU want.
Shop on the Last Day of the Month
Dealers need to move a certain number of cars in a month to get incentives from the car manufacturers. Salespeople are measured on a monthly basis. So if you buy your car on the last weekend or better yet the last day of the month, you’re more likely to get a good deal. They want you to buy a car and if you’re ready to buy and all they have to do is give you a good price, they’ll do it. They want to move that extra car this month. Better yet, try the last day of the quarter. It’s like magic!
Make Sure the Dealer Can Get Your Car
If you find what you want on the dealer lot, that’s the best way to make a good deal. But dealers only get a certain number of cars each month and the chances it’s in your color with your selection of features is pretty low. So dealers trade cars with other dealers to get the car you want. But they are eager to take your deposit and sometimes they don’t actually know where they’re going to get YOUR car. So always know where the car is and if the salesman doesn’t have a good answer, don’t make the deposit and walk away.
Put Your Deposit on a Credit Card
This tip is related to the issue of making sure the dealer has your car. Deposits on new cars are refundable if the dealer can’t get the car you want, but it’s a pain to get your money back. Being able to threaten the dealership with a chargeback on your credit card is a good way to make them refund your deposit if they can’t get the car you want for you.
Extras
The dealer will try to sell you all kinds of extras. Many of these extras have little or no value although some are worthwhile. Unless you know that your particular model is very prone to mechanical problems, I would avoid the extended warranty. Most new cars are amazingly reliable. Many extended warranties are actually very poor and don’t cover things that you think they should. Dealers like to sell them because they make lots of money on them. They make lots of money on them because they are generally a poor deal. Also a poor deal are undercarriage coatings or rustproofing, fabric protection, and paint protection.
VIN etching is more complicated. It’s generally a good thing, but keep in mind that the dealer is going to charge a lot for this: $200-$300 You can buy a do-it-yourself kit for $30. On the other hand, its pretty convenient to have the dealer do it for you.
Financial Planning
Remember that a new car needs to fit into your financial plan. I am always happy to work with my clients to make sure they don’t get overextended when the buy a car. For more information on services from Cereus Financial Advisors as well as lots of informative information on other financial planning topics, go to cereusfinancial.com. If you have any comments or questions, feel free to email me at info@cereusfinancial.com.
