Auto Buying 101
MONEY TALKS - My wife and I recently decided it was time to upgrade her 2006 sedan to something newer and more family friendly. As I began to navigate the car buying process, I soon learned that there was a lot I didn’t know. So naturally I did my research and immersed myself into the car buying world until I had a good understanding of the ins and outs. As part of my research, I spoke with friends and family who had recently purchased a car to hear more about their experience. What I learned is that everyone took a slightly different approach and there were not any consistent recommendations I could draw from. Accordingly, based on my research and personal experience I thought I would share some auto buying tips.
Set a Budget – Cars & trucks tend to be the largest purchase that Americans make without fully evaluating the financial implications for themselves and their family. It’s easy to understand how tempting it can be to purchase a shiny new vehicle especially when the dealership is happy to structure the loan based on your preferred monthly payment. That being said, just because you like the car does not mean you should purchase it or can afford the loan. Since many adults act like the proverbial kid in a candy shop when they walk into a car dealership, setting a budget beforehand is very important. You should aim to spend no more than 25% of your gross household income on your vehicles. For example, if a married couple makes $160k/year then they should spend no more than $40k to purchase their vehicle(s). Of course this number may vary based on your individual circumstances such as income, household debt, family size, financial life stage, etc. Nonetheless, the bottom line is you should come up with a budget before you seriously begin your car buying search to prevent yourself from falling in love and purchasing something you cannot afford.
New vs Pre-owned – There’s a lot to love about buying a new car because you get to pick out the make, model, color, options, and accessories. Not to mention, new cars traditionally have the latest safety and technology features and generally have better gas mileage. But perhaps the most important feature is that you’re covered by the manufacturer warranty. However, not everything about buying a new car is great. First off, they are considerably more expensive than used cars and they depreciate much faster. According to Carfax, the value of a new vehicle can drop by more than 20 percent after the first 12 months of ownership. Pre-owned vehicles on the other hand can be much cheaper. This lower cost may even allow you to afford a more luxurious make or model. You’ll experience less depreciation on the vehicle and your auto insurance premiums will probably be lower.
Price Shopping – When purchasing a new or pre-owned vehicle there can be a gigantic disparity between the asking price from one dealership to the next. Because of this disparity, it’s extremely important to spend the time shopping around to ensure you are paying the lowest possible price. If you don’t have the time to shop around, or dislike negotiating, there are online services such as CarBargains or TrueCar that will research pricing information and provide you with a list of local dealers offering the most competitive deals. Costco also has an auto program that negotiates prearranged pricing for their members and connects you with a local dealership that participates in the program. When negotiating the price, ask for the out-the-door costs which includes state and local taxes, registration, documentation, and dealer fees. Pay close attention to the cost of the vehicle rather than the monthly payment as there are lots of games the dealer can play to charge you more while lowering your monthly payment. It’s also important to check out any rebates offered by the manufacturer as they can be quite significant.
Negotiate Trade-In – The profit margin on new car sales is very slim so most dealerships make their money buying and selling pre-owned cars. As a result, most dealerships will offer you pennies on the dollar for your trade-in. It’s important to treat your trade-in negotiation separately from your purchase negotiation. In other words, you should formally agree on the price of the vehicle you are purchasing before you start talking figures with regards to your trade-in. When you are ready to talk about your trade-in, be sure to come to the table prepared. There are several online sites such as Edmunds and Kelley Blue Book where you can enter your vehicle information and get specific valuation information. Don’t be afraid to print these estimates out and take them to the dealership. If the dealership doesn’t want to offer you a fair price for your trade-in, you should strongly consider selling your vehicle on your own. Online sites such as Cars.com let you list your vehicle for fee while other sites such as Autotrader allow you to build an advertisement for a small fee.
Secure Financing – Financing can be a great option to purchase a vehicle for a number of reasons. Many car manufactures are offering cash back incentives for those buyers who finance a car through their lending program. Furthermore, the interest rates offered by these manufactures are often below 3% depending on the length of the loan. Pre-owned vehicles are typically financed through the dealership’s lending program and tend to have higher rates. Be sure to check with you local bank or credit union before agreeing to financing with the dealership as they can be very competitive and may offer more flexibility. When evaluating which loan is best for you, consider the down payment, trade-in value, loan term, and interest rate. If you need help with the calculation there are online calculators to help you determine how much car you can afford based on the highest monthly payment you can afford.
Regardless of if you decide to purchase a new or pre-owned vehicle it’s important to do your research. Make a list of must haves such as a sunroof or third row seating to help narrow down and identify potential vehicles. After picking a vehicle that meets your needs, be sure to read reviews so you can hear what other owners like and dislike. If you decide to move forward, schedule a test drive so you can get a true feel for the vehicle and don’t forget to examine the vehicle for any major defects.