Buying a Car? Make Sure You Follow These Tips
The days of being a clueless consumer walking into a dealership and letting the car salesmen explain all of the features of the new models are over. Today, you have the internet on your side. You can learn anything you’d ever want to about any car on the market before stepping foot into a dealership. You can research crash ratings, fuel efficiency, insurance rates, and even build a car with all of your desired options right from the web. With this knowledge comes power and you’re less likely to be scammed by a car salesman. But all of this information is useless if you don’t use it.
If you just walk into the dealership, pick out a car, and do the financing on the spot, you could be walking away having paid hundreds, even thousands, of dollars more, directly or indirectly, than you should have. That’s the old way to buy a car, and even though some people still do this, if you’re reading this you’re already one step ahead.
Here are the top six things you should know to be ready to buy a car at the best total price. Remember, it isn’t just the dollar amount on the sticker that matters since there are dozens of ways to save on car expenses over the life of ownership.
1. Are You Upside Down On Your Current Car Loan?
Welcome to the world of the 60-month (or longer) loan. Newsflash: vehicles are rapidly depreciating assets and the longer you finance them, the longer you’ll be upside down and pay excessive interest. While being upside down on a $15,000 vehicle is not as bad as being upside down on a $150,000 house, it’s still a stupid financial mistake. What makes it so stupid is that cars have a known depreciation rate so you can easily calculate whether or not you’ll be upside down on your loan, how long it will take to pay it off, and what you’ll pay in interest over the life of the loan. You can’t do this with real estate, at least not in this market. Because real estate values can go up and down at different rates over time it’s understandable that some people can be caught upside down. There’s no excuse when it comes to your car loan.
There was a time when car loans were a standard 36 months. Gradually the term became longer to enable more people to qualify for loans they couldn’t really afford, by lowering the monthly payment. The longer the term, the more you’ll pay in interest, so a lower payment is really not your friend. Does this sound familiar? It should, because the mortgage industry did the same thing. The 30-year fixed rate mortgage with 20% down used to be the standard. Over time they introduced zero-down loans, adjustable rates, balloons, ARMs, and even interest-only loans to allow more people to buy something they really couldn’t afford. It’s no different when it comes to buying a vehicle these days.
If you try to sell your car before the loan term is over, you may find that the car is worth less than you owe on it. To buy a new car, you’d have to pay off the balance on the original loan or roll it into the new loan, which creates an even more expensive car. Buying a car that depreciates quickly is another thing that can cause you to be upside down on your loan. If you buy a model that depreciates roughly 20% each year you’re going to lose money on it faster than a car that depreciates maybe just 7-10% a year. Don’t get into a cycle of constantly financing an upside down vehicle and letting your car make you poor.
2. Have You Researched the Trade-In Value of Your Current Car?
Keep the trade-in of your old car and the purchase of your new car as separate transactions. Get the trade-in offer before discussing the price of the new car, or finalize the price of the new car before discussing the trade-in. Some dealerships will offer you a good trade-in but will just raise the price of the car you’re buying, or if they already give you a good deal on a new car they might come in with a low-ball number on your trade. You need to know the trade-in value of your current car so that you have a rough idea of what to expect the dealer to offer for it. If the number is much lower than expected you know you may be getting taken for a ride.
One of the easiest ways to research the trade-in value of your car is to look it up at Kelley Blue Book. Here you can enter your location, vehicle make and model, mileage, condition, and features. It will then give you various prices for private party value and trade-in value. The trade-in value is obviously going to be less than what you’d get selling it privately because the dealership has to make money on it when they resell, so keep that in mind. If the difference is significant, you may want to consider trying to sell it privately first.
3. Have You Researched Interest Rates on Car Loans?
Don’t evaluate the deal based on the monthly payment. This is one of the biggest mistakes most car buyers make. Do you think it’s just coincidence that most car commercials advertise new cars by just stating how low your monthly payment can be? The interest rate is where most of the cost lies if you don’t put a significant chunk down. Know how much you’ll pay over the life of the loan by using a vehicle loan calculator to model some different loan amounts and rates.
One thing you can do before even shopping for a car is to check with your local bank or credit union about auto loans. See what they currently offer and whether or not you qualify. If you go into the dealer already pre-approved for a loan with your bank you know exactly what your interest rate is and how much you’ll be paying. If you wait for the dealer to try and find financing for you you’ll almost always get approved for something, but by the time you get to the financing stage you’re so emotionally sold on buying the new car that you don’t even care about the interest rate and just want to finalize the deal. This could literally cost you thousands of dollars.
4. Have You Considered the Benefits of Buying a Used Car?
There’s nothing like the feeling of buying a new car, but consider the cost. Cars depreciate sharply in the first two years — some models as much as 25-30%. The car you paid $25,000 just two short years ago may be worth only $17,000 now. If you’re someone who keeps cars for 7-10 years or doesn’t bother buying a new car until long after the first one has been paid off this isn’t as much of a concern. You’ll get your money’s worth. But if you don’t think you’ll keep the car 10 years you need to consider the potential savings by buying used. You can buy a car that’s literally only a year old and with only 15,000 miles on it and save 15-20% over new in many cases. The car may have had a previous owner, but it’s still nearly new and carries all of the original warranty. If you think about it, the money you save by buying a slightly used car will probably cover the insurance premiums on that car for as long as you own it.
5. Do You Know the True Cost of Ownership of the Car?
Don’t find out too late that you can afford to buy the car, but you can’t afford to own it, due to operating expenses, insurance, gas mileage, annual excise taxes, and other costs of ownership. You’re not ready to buy a new car until you’ve researched and considered this information. Just like when you buy a house, there’s much more to it than the monthly mortgage payment. This is how so many people get into financial trouble because they are told they can afford the monthly payments, but really can’t afford everything else associated with it.
New car buyers often don’t consider the higher costs of repairs and maintenance for certain models, tires that cost twice as much as those on other cars, higher gas costs, and higher insurance (depending on make, model, and even color). This is especially true once you begin looking at SUVs and luxury models. Insurance rates can be nearly double that of a smaller or less expensive vehicle.
One of the most important considerations is the repair record of the make and model. Does it have a history of problems with the transmissions? Brakes? Electrical systems? What does it cost for routine repairs and maintenance? You can find all this information at Edmunds.com. It doesn’t do any good to find a great deal on a car only to find out you’ll be spending $1,000 a year fixing common problems with that particular model once the warranty is up. This is a great site that can really help you save money and avoid being taken advantage of.
6. Have You Evaluated Any Dealer or Manufacturer Offers Like Rebates or Financing Specials?
A $2,000 rebate on your new car may sound good, but are you sure it beats the low-interest-rate deal the dealer may offer as an alternative? Don’t be fooled by the lure of cash upfront as it isn’t always the best choice over the long run. Evaluate the incentives and offers before you start seriously shopping. Check all of the manufacturer websites, ask your local dealers about incentives, and be armed with your options ahead of time. This will help you make sure you get any incentives you’re entitled to while also objectively comparing the true savings between offers.
The Bottom Line
Do your homework. Don’t roll the balance of an upside down loan into a new loan just because you’re tired of your old car and you’re just ready for something new. Don’t just walk into a dealer without having done your research and expect to be given the best possible deal. Don’t buy a new Lexus just because you can finally afford it if you get a 6-year loan. Vehicles are wealth destroyers, not wealth creators. While it may feel good to impress your friends or commute in style, foolishly wasting money on a vehicle is a sure way to retire broke.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
One problem with this post is that few dealer base trade-in value off of Kelly Blue Book alone. Just because KBB says your vehicle is worth xxxx of dollars does not mean that is the real world value. The only true number that a dealership will work with is what the vehicle is going through the auction at. Why would they give you say, $7000 for your vehicle as KBB states it is worth, when they can buy similar units at auction for $5500? And yes... this happens all the time.
Additionally, used is great. But a dealership will always give you the best deal on a new vehicle... there is way more money to be made in used vehicles, but new vehicles sales are what management bases "success" of a dealership on.
Also, used cars are great, but I would NEVER finance used car that did not carry a substantial amount of manufacturer warranty still on it. There is nothing worse than having to make your monthly payment PLUS spend a few hundred a month for repairs.
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I don’t think the one who follow this information on buying a new car will face any issue. According to me it is something that can take you at height of success in a very short period of time. http://www.mycarrental.com.sg/
Car loaning is my first option in buying my next car yet I'm also interested in just getting a used car instead of a new ones. I'm need to think more about it to avoid problems in the future. Anyway, thanks for the tips it somehow helps me a lot in clarifying things out. - http://lizloans.com
This is great post, especially for people who are about to buy new cars. Its always good to have outside information. Thanks Jeremy
Do your homework is right. Besides figuring out what you can really afford, research car prices at kbb.com and http://www.truecar.com and see what the lowest prices are that you can expect to pay
I learned at a young age never to buy a new car. It's so completely unnecessary. Instead I'll buy a more expensive luxury car a few years old. You get better technology, a better ride, and a more reasonable price.
Who would buy a new corolla for 15k (or so) when you could buy a 3-5 year old lexus for the same price? You can't tell me the corolla is better, toyota makes lexus as well...
Fantastic post! I am actually planning on buying a car in the near future, so this post was especially useful for me. The amount of information you included in this post was incredible - a VERY good read. Thanks.
Great post! Here's some information I found on buying a used car- it really helped me out, I thought it might help somone out: http://www.londoffadvantage.com/blog/2010/02/tips-for-buying-a-used-vehicle/
I would never again finance from a dealer because their interest rates are generally always higher than other federal credit institutions. Some federal credit institutions offer really great rates for loans so definitely consider that option before financing with the dealer.