Easy Money: How to buy a car

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Easy Money: How to buy a car

Welcome to Easy Money, where we make super-complicated financial stuff simple(r) to help you do it better.

Buying a car is second only to buying a house in terms of extra-large purchases Americans make in their lifetime. Unless you count the cost of college. Then it’s third. Very, very third. But sticker shock probably isn’t the biggest roadblock (sorry, too easy) car shoppers perceive. No one wants to be “that guy” — you know, the person who gets taken for a ride (last cheap pun, I swear) at the dealership. We can help you avoid that designation. Here’s how to buy a car.

Consider the big car buyer Qs

You don’t have to commit to an answer. In fact, if you’re on a tight budget, best practice is to keep an open-mind. But you should put some thought into each of these questions before starting your search.

New vs. Used?

The skinny: New cars come with higher price tags — and steeper depreciation. (We’ve all heard the line about a car losing value the second it leaves the lot.) Used cars can spare owners a lot of that depreciation and sticker shock, but they’re ... used, so there’s extra due diligence required when buying one. You don’t want to get stuck with a lemon. In terms of ancillary costs, used car loans tout higher interest rates, but shorter terms than new car loans. They’re also cheaper to insure, while new cars usually cost less to fuel.

When a new car is a fit:

  • You’ve got the money to put down.
  • You’re interested in the latest car technology.
  • You want to take advantage of a full warranty.
  • You’ve got good credit and can qualify for special financing deals.
  • You can’t get enough of that new car smell.

When a used car is a fit:

  • You want to skip the depreciation.
  • You’re on a tight budget.
  • You don’t have a chunk of change for a down payment.
  • You want a shorter-term auto loan.
  • You’re sure to pay high insurance rates due to age or other factors.

There’s one more option: You could also opt for a certified pre-owned vehicle. They’re lightly used and refurbished cars inspected and certified by the manufacturer or dealer. Certified pre-owned cars are more expensive than standard-issue used cars, “but in many cases, [buying one] can ensure you don't get stuck with a lemon,” Chris Burdick from Automoblog.net said.

Be sure to ask a lot of questions before buying a particular ride. “Certified pre-owned” doesn’t mean the same thing across car sellers.

Lease vs. Buy?

The skinny: Buying costs more upfront (think the down payment and higher monthly car bills), but, at some point, the car is yours. Leasing is basically a two- to-five-year-long car rental. It costs less upfront, but, given the car doesn’t — and most likely won’t ever — belong to you, there are restrictions, like mileage caps and penalty fees.

Who buying is right for:

  • Someone who puts a lot of miles (or dings) on their cars
  • Someone who cares about equity and resale value
  • Someone looking to build credit

Who leasing is right for:

  • Someone who likes changing rides every few years
  • Someone who doesn’t have money to put down
  • Someone looking for lower monthly payments

We’ve got a full explainer on the pros and cons of leasing vs. buying here.

Make & model?

The skinny: Obviously, this choice is need-based. If you’re in a family of five, you’re not going to buy a corvette. Plus, you’re tied to your budget. BMWs are sleek AF, but rule of thumb says don’t buy more car than you can afford. Having said that, there are overarching factors to consider when trying to find the best car for you. They include:

  1. Reliability: Is the vehicle known to give existing owners problems or need early-on repairs?
  2. Safety: Has the vehicle performed well in crash tests? Does it come with basic safety features like airbags, anti-lock brakes, traction control and seat belts or newer technology, including lane departure warning and a collision avoidance system?
  3. Performance: All cars don’t handle roads the same, and while most people think of speed and responsiveness as measures of performance, personal preference plays a role in which cars you feel most comfortable driving.
  4. Fuel efficiency, because gas guzzlers are expensive and bad for the environment.
  5. Total costs: Remember, you’re not just paying for the car. You’ve got to insure it, fuel it, register it and maintain it. You’re also going to pay sales tax (unless you live in a state that doesn’t have a sales tax). Plus, if you’re financing, you’ll pay interest over the life of your loan. Be sure to account for these expenses as you narrow down makes and models.

Fortunately, there are a number of places that rate and review cars on the market. Some of the sources to tap include the National Highway Traffic Safety Administration New Car Assessment Program, the Insurance Institute for Highway Safety’s Top Safety Picks, J.D. Power Vehicle Dependability Study and Edmunds’ True Cost to Own calculator.

Make an informed decision

OK, you’ve given your car purchase some thought. What’s next? More research.

  1. Get your credit ready, because your scores will largely determine the interest rate on an auto loan or lease. You can get both with bad credit, but it’ll cost you. The lowest rates usually go to people with scores over 780, while high rates are reserved for people with scores of 600 or lower. Fortunately, we’ve got a crib sheet to improving your credit here.

  2. Determine your down payment. If your credit is excellent, you can buy a car with zero money down, but it isn’t in your best interest, thanks to depreciation and … well, interest. The ideal scenario involves a 20% down payment, but most people don’t go ideal scenario. Bottom line, the more you put down, the lower your monthly payment. And if you put down less than 20%, consider gap insurance.

  3. Memorize MSRPs, formally known as the manufacturer's suggested retail price or sticker price. That’s step one to paying fair market price for the make and models you’ve decided to pursue. Sites like Kelley Blue Book, TrueCar or Autotrader can help you price vehicles and locate nearby dealerships. Manufacturers also list starting MSRPs on their website.

  4. Pre-shop for financing. Yes, you can get a loan at the dealership. No, it probably won’t come with the best interest rate. That’s why you should ask for quotes or, even, pre-approval from local banks and credit unions. At the very least, it’ll give you an idea of the monthly payment. What’s a “good” rate on a car loan? The average annual percentage rate on new financed vehicles was 5.2% in February 2018, according to Edmunds.com.

  5. Pull car insurance quotes. Yes, you should pre-shop policies, too, because (a) some cars cost more to insure than others, so you’ll need to account for that expense and (b) car insurance is required to drive off the lot. Few people take the time to comparison-shop when they’re signing on the dotted line at a dealership. (We can help you easily compare car insurance quotes here.)

  6. Research car sellers. You’ve got to vet dealerships just as carefully as vehicles, especially, especially, especially if you’re buying used. Google the dealership for reviews. You should also check for complaints and a poor rating with the Better Business Bureau. The website DealerRater is another valuable vetting resource.

OK, time to shop!

Now that your preliminary research is done, you can

  1. Get quotes from multiple dealers. That’ll (a) help you determine a vehicle’s fair market price and (b) provide leverage when it comes to negotiate. “Email several dealers to ask for their best ‘drive away’ price in a ‘buyer’s purchase order’ (for new cars) or ‘bookout sheet’ (used cars),” Sonia Steinway, co-founder of Outside Financial, said. “If they say you need to come in, tell them you will – if they give you a great price in writing.”
  2. Test drive a few makes and models. All the online research in the world can’t confirm whether you’ll actually like the way a car drives. You’ve got to get behind the wheel. Plus, if you’re buying used, the test drive is a great opportunity to screen for potential maintenance issues. “Important things to keep an eye on include: testing all transmission positions to listen for any issues, checking the functionality of the windshield wipers/washers and confirming that the odometer is working properly,” said Richard Reina, an auto expert and product training director for CARiD.com.
  3. Ask questions about all the bells and whistles the car could, does or doesn’t come with. “It also doesn’t hurt to ask about possible add-ons or upgrades available to a particular model you are considering,” Reina said.
  4. Have patience and visit more than one lot. “Even if you think you found the ‘one’, you can save by comparing the price for similar vehicles offered by other dealers,” Steinway said.
  5. Inspect the car for dings, scratches or any wear and tear, even if it’s new.
  6. Negotiate!

How to negotiate car price

You can talk price with a car dealership, but your success ultimately hinges on more than your sweet negotiation skills. Supply and demand rules are in effect, so if you’re looking for a “hot” car in a popular color, you can expect to pay close to the MSRP. If you’re looking at vehicles not-so-in-demand — say, one at the end of its model year or anything bright orange — you’ll have an easier time getting a good deal.

Timing is important, too. There are car sales seasons, notably May (Memorial Day deals!) and October through November (when dealerships need to make room on the lot for new models). Plus, dealers get bonuses for meeting monthly sales quotas, so rolling at the end of the month, when a salesperson is a car or two away from hitting their numbers, could work in your favor.

Having said that, here are a few tips for striking a deal.

  1. Focus on the purchase price, not the monthly payment and certainly not any rebate a dealer is wagging at you. Why? Because there are plenty of ways to reduce a monthly payment without saving the shopper a dime. In fact, it might cost you money, given a common tactic involves extending the term of an auto loan. (The longer you’re paying, the higher the total interest.) Keep your eye on the much more straightforward total price.
  2. Ask about fees, and if they seem odd, see if the dealer will waive them. If they won’t, try to work the charge into your desired purchase price. Shoppers are usually stuck paying a delivery fee, sales tax and a documentation charge (the price of processing your contract). And, if you’re leasing, expect to pay for gap insurance. Still, secondary delivery charges, dealer prep or advertising fees aren’t universal — and much more negotiable.
  3. Talk trade-ins after the fact. The best way to score a deal on purchase price, trade-in price and financing is to handle each transaction separately. “There’s no need to lie to a salesperson if they ask about trade-ins or financing while you’re discussing price,” Steinway said. “Just tell them you want to focus on one issue at a time.”
  4. Just say no, if you’re unhappy with the dealer’s proposal or their customer service. There are plenty of other fish in the sea.

Buying used?

There are extra steps to take before saying “yes” to a ride. Here are the big two:

Find out the car’s history. You’ll want to know that the seller actually owns the car and what it’s been through. Fortunately, there are plenty of services specializing in car reports, including Carfax and AutoCheck. For a fee, they’ll tell you where a vehicle is registered, what accidents, if any, it’s been in, what repairs it may have had, odometer readings, recall information and more. You should also request a report from the National Motor Vehicle Title Information System, a government agency originally set up to prevent people from buying stolen and unsafe vehicles. Sounds like a project? No worries, we’ve got a step-by-step guide to looking up used car information online here.

Opt for a third-party inspection to verify you’re not buying someone else’s problem. “Go to an independent trusted mechanic and leave the car with them for a few hours,” Burdick says. “You'd be surprised what little stuff they might find that either the seller was trying to hide, or didn't know about.”

You’ve made a deal. Now what?

Well, you’ve got a bunch of paperwork to do.

  1. Review and sign your contract. Make sure that the terms are as agreed and there’s none of those funny fees we mentioned earlier.
  2. Resist the extras. An extended warranty is sometimes worth it, but you don’t necessarily have to get it at the dealership — or before driving off the lot. You can comparison-shop later to see if the manufacturer or a reputable third-party is offering a cheaper or more valuable warranty. Other extras — like vehicle identification number etching, rust-proofing or any interior/exterior protections — are usually worth skipping. Some (see: VIN etching) are actually useful, but pricey when purchased through a dealership.
  3. Register your ride. Most dealers help you through this process. They’ll charge a fee for the service, but it’s generally worth paying. I mean, where else are you going to get temporary car tags?
  4. Get your car insurance going. Hopefully you picked an insurer and policy before the car. If you didn’t, buying car insurance on the fly isn’t the end of the world. There are ways to score a lower premium after the fact. In any case, you’ll need to call the insurer, provide a VIN and ask them to fax proof of your brand-new policy before the dealer will let you drive off the lot.
  5. Read the manual. I mean, not necessarily the second you get home, but there’s plenty of information in there you’ll want to know, including what all the lights on your dashboard mean, how the radio works and when you should bring the car in for regular maintenance.

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Image: GIC