I have been lucky enough to drive my family’s hand-me-down cars almost all of my life. My old faithful Toyota Highlander hit 200k miles last year, and with this milestone I decided to retire it for a “new” (to me) car better suited for my frequent road trips. I have learned a lot about buying cars over the years from the people around me, and I learned even more by going through the process myself. For many of us, buying a car is one of the biggest purchases we will make, and I have heard plenty of bad stories of what happens when you buy the wrong one and/or at the wrong price. There are several things to consider when preparing to buy a new or used car including what to buy, how to pay for it and what to look for.
Be sure of what you want to buy.
What is motivating your purchase? Do you need more cargo space for your growing family? Are you looking for a car with better safety features or new technology? Starting here will help you identify your needs (for example a certain price, mileage or a specific feature) and your secondary list of wants (maybe interior/exterior color options). Write it down. Being clear on your non-negotiables vs. nice-to-haves will provide boundaries for your car search and minimize distractions.
If you have your heart set on a specific make/model, be open to trying alternatives. It never hurts to test drive multiple cars for comparison, and you might be surprised by what you like! It is easy to rush into a purchase decision (especially at a dealership) but remember that you can always walk away and come back tomorrow. Often, sleeping on a decision brings clarity in the morning.
Determine how to pay for it.
Once you identify your next car, do some research online to determine what price you should expect to pay for it (www.kbb.com is a good resource). If you plan on selling your current car, do your homework here too. Do you plan on trading it in to the dealer you are purchasing from? If so, you should treat these as two separate transactions to research and negotiate. Dealers will often try to bundle the trade in value into your new purchase, which does not tell you what you are paying for the new car or selling the trade in for. Be clear about these numbers. You will likely find that your research does not align with what the other party is asking, so this is an important step.
If you are shopping through a dealership, you will likely hear them ask you, “What monthly payment can you afford?” Dealers often defer to monthly payments because they can easily adjust a payment to fit your budget and still make their profit by lengthening the term of your loan or adjusting the interest rate. Do not answer this question, but instead keep your total purchase number in mind. Everything about the negotiation depends on you knowing your bottom line, not the dealer. Play your cards close to your chest and also remember your total figure should include taxes, registration, and transaction fees.
If possible, paying cash for your car is almost always the right answer. Weigh the pros and cons of buying with cash vs. carrying a car note. Buying your car outright will save you money in interest and will not significantly impact your monthly cashflow. Two big wins. However, if the interest rate you are offered is less than what you think you can conservatively make in your investment accounts, perhaps it makes sense to keep your money working in the market rather than pulling it out. Cars are mostly a depreciating use asset after all. If you decide to take on debt, be sure you are not overspending. In general, you should limit your loan to a 4-year note (not 6 or 8 years) and keep your monthly payment amount below 10% of your monthly take home pay.
Know what to look for.
Buying a brand-new car rarely makes financial sense. Research shows that your new car will decline 15-20% in value within the first year of owning it and 10% in the first month alone after you drive it off the lot (www.carfax.com). Yikes! Additionally, you are not privy to historical maintenance, recall or safety data on a brand-new car that would be available on a 2 or 3-year-old car. Most importantly, if you finance a new car that depreciates very quickly, it is possible to become “upside down” on your loan, meaning your car is worth less than what you actually owe. This is a common trap people find themselves in, and it can have a significant impact on your financial wellbeing.
An alternative to the above scenario is buying a certified pre-owned car, or CPO. These are used cars that have been sold back to the dealership, at which time they go through a rigorous maintenance inspection before resale. CPOs often include an extended warranty as well, so you can benefit from some of the perks of a new car (dealership approved and warranty attached) without the price tag.
If comfortable, you can also find a great used car from a private seller if you know what you are looking for. Doing so will likely remove the dealership markup, so both you and the seller can benefit financially from the transaction. Make sure you do your homework and review the Carfax report for any car you are considering (many independent dealers provide this at no charge). Be sure the car has not had any major accidents or body work reported that will impact structural integrity or resale value. Additionally, it is worth the investment to take a potential car purchase to your mechanic for a pre-purchase exam before you buy. You can save yourself a lot of money and headache later on by making sure you are buying a good quality, well-maintained car.
If you are well-informed and patient, you will likely have a positive experience next time you step onto the car lot. It took me over a month to find the exact car that would fit my criteria and my budget, but I was successful and now love my “new” used car more than my old Highlander. Take your time, be willing to walk away, and most importantly do not buy a car that will negatively impact your financial wellbeing. You will find it is rarely worth it in the long run!