Saving to Buy a Car
There are entire books devoted to this topic, but let me share a few basic financial thoughts. Use these as a starting guide to do more research on your particular situation.
Think of buying a car as an investment. Will the car help me travel to a job that allows me to earn more money? Will the make / model of car I want to buy retain its value or does it have a poor reputation? Does the car get good gas mileage? Am I buying a car that is practical (seats my whole family, relatively inexpensive, good mileage) or am I buying a toy? Do I really need a truck that has poor gas mileage and only seats 3 people? Do I really need a luxury model sports car that costs a lot initially and to maintain? Many people buy a car for psychological reasons – to improve their image / status. Don’t fool yourself.
Do you need a car or is it a “nice to have”? If you live in an urban area, the cost of parking, insurance, garage can be high. If you can use public transportation to get to work / school, consider renting a car when you need to go out of town.
Can I afford a new car or should I buy a used car? New cars have the benefit or never having been abused by a previous owner, but cost more. If you can’t afford a new car, or if you have a trusted friend, relative or neighbor who you know has regularly maintained the vehicle (and may even give you good price), consider buying from them. Cars of elderly people often have very low mileage and have been regularly maintained. Elderly people, unfortunately reach a point where it is no longer safe for them to drive. Often in the preceding immediately, years, they drive very little (< 5,000 miles per year).
If you do buy a used car, make sure it you have it thoroughly inspected by a mechanic you trust.
Buying a used car from a car dealer should come with a multi-year warranty for any major repair. You will pay extra to buy from a dealer, but it could be worth peace of mind. Make sure it is a reputable dealer.
Should I buy or lease a car. Understanding the complexity of car leasing arrangements is beyond the majority of many car buyers. Lease are designed to get you to buy or pay more than you should, but it seems like less because it’s a lower monthly payment. The more likely situation is that you will be paying more money in the long run. If you can’t afford to buy the car all at once, as most people can’t, consider taking a loan from the dealer, your employer or bank. In times when automobile purchases are slow, auto manufacturers often provide low to no interest loans. Also, auto manufacturers often offer rebates on new cars to improve their sales. Make sure you know what incentives the manufacturer is providing before you start negotiating with a dealer. Often the dealer will make it look like they are giving you really good price, but they are in fact just passing a long a manufacturer’s rebate you are going to get anyway.
All car purchases are negotiable. Auto manufacturers publish a MSRP (Manufacturer’s Suggested Retail Price) as a starting [price. In hard economic times, you can usually purchase below MSRP and get manufacturers rebates. In better times, you may have to pay a premium above the MSRP. Ask the dealer to tell you the price first. Don’t answer the question “how much are you willing to pay?” He’s the seller and should name the price. Always be willing to walk away. Ask for a lower price at least 3 times. You can find out the dealers cost of the car (“Invoice price”) on internet web sites like Kelly’s Blue Book, Edmunds or others. Offer the dealer invoice price + a small profit ($400 – $800) – minus the manufacturers rebates. Try buying the same car at multiple dealers. See who offers the best price.
If you have an older car to trade in, try selling your trade in separately / privately on your own. While it is convenient to trade in the old car, the dealer will be looking to take advantage of you by paying you less for the trade in than the car is worth. Another typical trick si for the dealer to offer you a great trade in price, but then build a higher profit into the lease of the new car.
If you are going to lease a car, make sure you understand “residual value” (how much it will cost you to buy out the lease (you own the car) at the end of the lease period. Also, how many miles are you allowed to drive each year, and how much will it cost if you exceed the allowed miles? The key comparison to make is the “final total price to buy the car” vs the total lease cost (down payment + (monthly cost x the number of months) + residual buy out price.