April 17, 2012

A New Car! ...or Not?

Credit: M - Pics
You can acquire a car in lots of different ways. Some people buy with cash, some people buy with credit cards, some people buy with the help of an auto loan, some people lease, and some people even steal. Not many of us will ever be fortunate enough to win a game show and just walk away with a car. So, one of my wife’s friends asked what’s the best way to acquire a personal mode of transportation? Well, it depends - on your lifestyle and time frame, on your available assets, and on your “craftiness” at the dealership or car lot. Let’s take a look at how to best get that sweet ride.

Do you have to have the latest and greatest vehicle out there? Do you want to have a new car every 3 or 4 years once that new smell wears off? Are you just looking for a reliable form of transportation for the next decade?  As long as you are financially capable, these lifestyle preferences are neither right nor wrong, but you should at least consider their financial implications.

  • Leasing: If changing cars frequently is important to you, then you should consider leasing due to the lower monthly payments and lower probable maintenance costs, but you should also recognize that you will always have a car payment.
  • Buying: If you are planning on keeping the car for most of its life or paying towards owning something is important to you, then you should consider buying a car.
    • Buying Used: A used car will have a lower price, will depreciate in value at a slower rate, and will have less expensive auto insurance, but it could potentially have more maintenance costs since you would have a limited warranty at best and cannot know what the car has actually been though.
    • Buying New: A new car will have a higher price, will start depreciating in value quickly, and will have more expensive auto insurance. A new car will come with a longer term warranty, and like buying a used car, you will eventually own it.
Assuming your car lasts, buying your vehicle eventually means no monthly payments; just gas and maintenance expenses and the ability to sell something you own. Still don’t know whether to lease, buy-used, or buy-new? Let’s consider a car’s true cost and then your available assets.

A car does not cost what the vibrant-colored numerals say on the windshield, and it does not cost what the seller or dealer initially tells you it will. A car will actually cost you the sticker price plus sales tax (probably 5-8%), plus the price of any options or add-ons you may have agreed to, plus the interest you pay over time if you do not buy the car outright. You also will now have to acquire additional auto insurance, pay for gasoline, and be able to afford regular and unplanned maintenance. Now that’s too many variables for me to give you a useful numerical example, but the bottom line is, you need to estimate all the initial and monthly costs of a new car and look at your monthly cash flow and savings. If you see that the new expenses will cause your monthly cash flow to become negative or your current assets to start declining, you need to look at a less expensive new car, consider used cars, or consider leasing. You can save up and get that car you have always wanted next time, without straining or destroying your financial health this time!

Finally, assuming you have decided to buy a car, used or new, here are a few tips on how to get the best deal:

  • Do some research and know what kind of car you want before you go shopping.
  • Know what options and upgrades are available and what you want before you go shopping. Do not waiver on your decision when you start shopping.
  • Do some research and know how much the Manufacturer’s Suggested Retail Price (MSRP) is. This empowers you when the seller is telling you what a good deal you are getting.
  • Check your credit score and ensure that the reports are accurate before you go shopping.
  • Go to your bank and consider getting pre-approved for a car loan. This gives you an idea of how expensive of a car you can afford, what your monthly payments would be, and what your interest rate would be. This not only helps you decide how best to acquire a vehicle, but it also acts as a safety net and point of reference when negotiating financing with the seller. You hold the cards. See if the seller can beat or match your bank’s offer.
  • Plan when you shop. The end of the year when new models are arriving, the end of the month when sales quotas may not have been met, and even rainy days when no one else is buying a car are supposedly the best times to get a deal.

I hope this helps. Happy shopping!


1 comment:

  1. Great information, Tom. Another bit of advice would be to check with your credit union (and join one if you aren't a member). A credit union sometimes sells cars as well as searches for cars that you are interested in. The credit union financing is usually better than a bank's and definitely better than the dealership!