NOTE: I found this article on my hard drive recently. I had started drafting it, and never finished it. Much of the material in the article ended up in other postings on this blog. But here is the original article, which has some good points as well.
HOW TO BUY A RIDE WITHOUT GETTING STUNG
Most folks don’t plan the process very well, and as a result, end up paying too much for a car, and often end up squandering a large portion of their wealth on automobiles – unnecessarily. I have met many retirees who have used up their retirement savings and are forced to live on Social Security – which is not easy! But during their earning years, they bought or leased new cars every 2-3 years. If you want to know “where all the money went”, there’s a hint right there.
The best piece of advice is never, ever, buy a brand new car, period. To many people, this advice makes no sense. After all, everyone buys new cars, right? All my neighbors get brand new cars every few years. It can’t be a wrong thing to do, can it? Can so many people be so wrong?
It is well documented, and you probably already know, that a new car depreciates about 5-20% the moment you drive it off the showroom floor, depending upon make and model. If you buy a brand new car and try to sell it the next day, you can expect to lose thousands of dollars in the transaction. So what does this tell us about the real, inherent value of a new car? The answer is simple – a new car is typically overpriced by 5-20% of what the “market” truly believes the product to be worth.
So why do people pay too much for new cars? Because a new car dealership has salesmen and a well-engineered system to pressure you into paying too much. Buying a new car is a chore and a nightmare for many people simply because you cannot win in the process. Salesmen get you into the showroom, and they won’t let you go – often for hours at a time – until they have “sold’ you a car.
Of course, everyone thinks they have the savvy and know-how to beat the system. The truth is, however, few of us can really come out ahead in a new car transaction – even if we can beat the phony financing scams, come-on pricing, aftermarket add-ons, and other commonplace rip-offs. The reality is, you aren’t as smart as you think you are – chance are, you’ll get fleeced.
Men are probably the worst at this. My neighbor went to a new car dealer on a weekend, with his children in tow (two big mistakes right there) to buy a convertible. Eight hours later, he drove home in his new station wagon. He did not buy a new car, per se, so much as he was sold one. And there is a difference!
And even assuming a best-case scenario – where you pay a fair “new car” price for the car, you still come out behind. As noted above, your car will be worth substantially less than what you paid for it the moment you purchase it. Even if you win, you still lose.
Buying a brand new car isn’t quite the most expensive way to own a car. Leasing a brand new car is. Not only are you taking the 5-20% initial new car hit mentioned above, you are also getting socked on interest and price as well.
In any financial transaction, the more complicated you can make the transaction, the easier it is to conceal the actual terms – terms detrimental to your interests. In the case of the lease, these terms are the PRICE of the car, and the INTEREST RATE (sometimes called the “Cost of Money”). Many lessees never see these numbers, or if they do see them, are only peripherally aware of them. They focus on MONTHLY PAYMENT and not the overall cost of the transaction.
And not surprisingly, many lessees end up paying more for the car then they would have had they negotiated a straight cash sale deal. The reason is simple – they don’t think they are buying a car, so they focus only on monthly payment. Similarly, since they don’t think they are financing a car, they don’t worry about interest rate. But when you lease a car, you are borrowing money from the bank, at a predetermined rate.
1.A New Car is More Reliable: FALSE. Many folks are paranoid about “breaking down somewhere” and this is very true with women in particular, who are often regaled with stories about some poor soul whose car breaks down, and is kidnapped, robbed, and raped. The truth is, you’ll spend more time in a dealer with warranty repairs with a brand new car than with a well-maintained LATE MODEL used car. Many of us have horrible memories of the older “junkers” that we drove as college students (and didn’t take care of) and thus have a negative image of used cars in general. But a car with only 20,000-50,000 miles on the clock should give many years of reliable service, provided it is well taken care of (more about that later).
2. You’ll Get Ripped Off Buying Used Car: FALSE, provided you do your homework. Yes, it is true that you can get ripped off buying a used car, but it is also true that you ALWAYS get ‘ripped off’ buying a new car. While you cannot do anything to eliminate the huge depreciation hit on a new car, you can manage the risks of used car buying. Doing the research first, having the car checked over, and staying away from “fright pigs” will largely eliminate most risk. Staying away from used car dealers, in particular, is a good idea.
3. Used Cars Can Leave You With Huge Repair Bills: FALSE. One of the most irrational fears I see in car ownership is the fear of the staggering repair bill. For many people, Car repairs are a mystery and come and go like the weather without rhyme or reason. Again, a well-maintained car should go well over 100,000 miles without major repair. Most late model used cars are still under warranty for 50,000 miles or more. And most repairs out of warranty are fairly inexpensive compared to the cost of depreciation or insurance on a new car. Other than a catastrophic engine or transmission failure (both very rare, even in the worst made cars) most car repairs will total in the hundreds of dollars, not in the thousands.
In short, while the PERCEPTION in society is that buying a used car is risky business and could possibly bankrupt you. The REALITY is, buying or leasing a string of brand new cars is a guaranteed route to middle-class poverty.
Again, many people are afraid of “repairs” to older cars, and will dump a perfectly serviceable car after a repair bill for a few hundred dollars pops up. They ditch a perfectly good car because of a $500 alternator replacement, only to sign on for four years of car payments at $500 per MONTH. Sound ridiculous? Well, it is. And it happens all the time.
Many repair places offer “lifetime warranty” on repairs or repair parts (mufflers, for example). The reason they can do this is simple – statistically, most used car owners tend to sell their cars every 3-5 years, and usually after a repair is made. The cost of repair ends up being the impetus to sell – with the specter of other repairs on the horizon.
Many older people still remember car reliability from the “bad old days” and treat their cars accordingly. I have a friend with a beautiful Toyota truck, with only 68,000 miles on the clock. This is a vehicle that can easily be driven 200,0000 miles or more with minimal repairs. However, he is convinced that any car with over 50,000 miles on it is “unreliable” and thus plans on unloading the car soon. As a result, he never took very good care of it, washed it, waxed it, or kept it garaged. His short life expectancy for the vehicle became a self-fulfilling prophecy.
There is an end game to used cars, of course, and throwing thousands of dollars at a used car is often a bad idea. A good rule of thumb to follow is that when a repair cost exceeds the book value of the car, it is time to throw in the towel. Sign the title over to the mechanic or sell the car for scrap.
Thus, if your car has 175,000 miles on it, and a book value of only $5000, and it needs a new transmission or new engine, chances are, it is time to call it a day. But on the other hand, throwing away a 125,000 mile car just because it needs a new set of tires is just being silly. Tires are a wear item, and you will wear out the equivalent amount of rubber on a brand new car. So yes, know when to quit, but no, don't toss in the towel too early.
If you decide the junker in your driveway really has to go, there is a scientific way to replace the car. It involves some research and legwork, but fortunately for you, we have the Internet to help out with a lot of these chores.
1. Don't be in a hurry: A salesman loves a person who comes in and says "I need to buy a car today". Forget having any leverage or advantage! They make tens of millions of cars in this country each year, so don't worry about them running out. There are 300 million people in this country, and over 320 million cars - more than one per person! So when the salesman says "They didn't make many in THIS color!", wait a few minutes - another one pops off the line about every 4 minutes or so... Don't be rushed. There are plenty out there....
2. Pick one make/model/year range to shop for. Comparing Toyota Camrys to Honda Accords to a Pontiac G6 is hard, as the models vary in price and condition and you are comparing apples to oranges. If you can fixated on ONE particular car and option package(s) and small range of years, it makes it easier to look at several and get a feel for what they are worth. Consumer Reports has useful comparison information on different models which is of some use. If you like Toyotas, (nd they are good machines. Very reliable.), pick a particular model to shop for, and it will make it a lot easier. Don't be like my neighbor in Virginia, who went shopping for a Volvo convertible, and came home with a station wagon (!!).
3. RESEARCH. Do some price researching on www.edmunds.com (It is hard to find, but look for the "True Market Value" Or TMV link on their site). You can price out a used (or new) car, option by option, even compensating for color choice and area code. There are also 5 levels of condition value. www.kbb.com and www.nadaguides.com are also useful, but as dealer-generated guides, I find their data a little more self-serving. But visit all three, print out the data, and at least you'll know what to expect in terms of pricing (and what is a "fair" and reasonable price). Expect to pay a fair price, too. Too many folks obsesss over a "bargain" - which rarely happens.
4. RESEARCH some more. Go online to a usergroup for owners of that car. A google search should turn up a Toyota owners group, for example. Visit the discussion group and read some of the postings about common problems for that make and model (so you know what to look for). Ask a question, if necessary. Someone will bend your ear on things to look for, what problems are common to particular models, what to avoid, etc. Some years and options are more troublesome that others. In every make (even Hondas and Toyotas) there are "dog" years and dog cars, that are nto a reliable as most of the others. If you can spot this, it can save you a lot of trouble. Also, you can find out what common service problems and recalls to look for. A BMW X5, for example, goes through CV joints, so if this has been replaced by the previous owner, it is a plus...
5. RESEARCH SOME MORE: Look at several sources for listings of cars for sale. www.autotrader.com is a one place to look (they also publish a "hard" version of AUTOTRADER available at your local 7-11). Local classifieds are usually the worst - they are flooded with dealer listings and the selection is very limited, to say the least. But look there, too. Look anywhere! Even eBay can be a place to look - but is not for the faint of heart or inexperienced. And I would never buy a car on-line without looking at it in person (OK, well, there's my Jeep, but there's my case in point!). Be illing to drive a few hours to find the right car - limiting yourself to the immediate area means limited choices.
6. Avoid used car dealers most used car dealers get "fright pig" cars from auto auctions, which are the cars the new car dealers take in trade and then pass by, as they cannot sell them as "certified" used cars. The 30 day warranty provided is usually next to worthless. Some newer franchises like CARMAX are not as bad as the old shafty used car dealers of old. But they do have a profit margin to maintain as well.
7. New car dealers: These charge top dollar, but many offer extended warranties on their "certifed" used cars. Not my cup of tea, personally. Many new car warranties run for 4-5 years or more - and are transferable, so if you are looking at a late model car, it may be under warranty anyway, no matter where you buy it. Frankly, the surcharge many new car dealers charge for these extended warranties is just not worth it. Most dealers mark up a used car several thousand dollars. This is more than enough to pay for a new engine! So the extra “piece of mind” of an extended warranty is really illusory. You are paying top dollar for this “security”.
8. Individuals: The BEST BET is to find a well-maintained car from a reasonable individual. Look for a one-owner car, garage kept, with all service records. It should be clean and immaculate. You may have better bargaining power with an individual, and they don't have a dealer overhead to maintain. Cars like that are out there, but you do have to look. Since most people buy through dealers, there are more of these cars available than you'd think. A real babied car can be a joy to own. A mystery machine, off-lease at Akbar's shiny used car lot (with 20,000 mile old changes) can be a nightmare. There are also cars for sale by individuals which are neglected, abused, and overpriced - these "dreamers" list their cars for months, hoping someone will bite. It amazes me, but someone ends up buying these nightmares, eventually. It goes without saying to avoid nasty and difficult or pushy people. Use your gut instinct. If they seem like bad people, don't buy a car from them...
9. RESEARCH YET MORE: You can find LIMITED car data on www.carfax.com. Sign up for the "unlimited" 30 day service if you are car shopping. It does not cost that much. You can type in a VIN number, and it will pull up some (but not all) data on the car - whether it was leased, commercial vehicle, in a wreck, etc. A "clean" Carfax report is not a guarantee of anything, but a dirty record can tip you off to a problem car. Run the Carfax report BEFORE you drive out to look at the car. If the seller won't read you the VIN number, well, that tells you about them....
10. DO MORE RESEARCH: Have your local trusted mechanic inspect the car. Once you have narrowed it down to a particular car, have your local mechanic check it over (Cost, usually an hour shop time). If the owner balks, well, you know you've got trouble. A good mechanic can spot potential repair problems and/or accident damage. Repairs aren't necessarily a deal-killer, but they can be useful as a negotiating tool.
As you can see, it does take some RESEARCH to educate yourself in this process. Sticking to one make and model car helps a lot, as it cuts down on the amount of research you need to do, and also makes it easier to compare cars.
1. You can raise the deductible on your insurance, and cut your premiums dramatically. You can even drop some coverage entirely, if the car is old enough.
2. You pay no interest on car loans – interest that could cost thousands of dollars.
Now the economists out there will point out that tying up money in a depreciating asset like a car does have an “opportunity cost”. You could be making money in the Stock Market on that money! This is true. However, generally, what you make in the stock market or in a bank account rarely exceeds the interest rates on car loans. And moreover, if you are borrowing money to pay for a car, chances are, you don’t have all that “extra” cash lying about to invest in stocks. Paying cash for a car means not paying 8% per month on loan payments, and that is the same as earning 8% interest – which is not a bad return these days.
If you have to borrow money, be smart about it. Dealers like to use come-ons like 0% financing or low finance rates to get you to buy a new car. The joke of course, is that only people with absolutely perfect credit scores qualify for this financing. And of course, if you take the low or zero interest financing, you forfeit any rebates or other discounts – and it is harder to negotiate on price. So forget about these con-jobs, they really save you no money at all.
One of the best bargaining advantages in the used car business is having cash. Individuals selling their cars don’t have the advantages of car dealers – offering financing packages and making it a smooth deal. So buyers with cash in hand have the upper hand – which is why “private sale” prices on used cars are such a bargain.
If you don’t have the cash, at least borrow smart. Your local credit union can pre-approve you for a loan, or quickly approve a loan for a used car. While paying 5-8% may seem like a lot more than the “free” financing down at the car dealer, bear in mind that the 0% financing gimmick is just that – you are not getting anything for free at all. Once you have a loan approved, you can negotiate price as a straight cash deal.
An even better alternative is to use a home equity loan. If you qualify and if you have enough equity in your home, the interest on such a loan MAY be tax deductible. But, beware of excess fees in such deals, and keep a close eye on the interest rates. One advantage of a home equity loan is that since the loan is not tied to the car, you own the car outright, and thus don’t have to pay expensive insurance premiums.
As I noted before, almost anyone can afford to pay cash for a car – and I’m sure you don’t believe me still. The key is in deciding how much car you can REALLY afford – not how much you think you deserve. Most people select their car based upon what their neighbors are driving – and what they think will impress the neighbors. Yes, admit it, a huge portion of your ego is tied up in what you drive. Overcoming this obstacle can be a big first step in true financial freedom. Defining yourself by what is parked in your driveway is awfully shallow – and short-sighted.
It may make more sense to buy LESS car than you think you can afford, take the money you saved not making car payments, and put it in the bank. By the time you are ready for a new car, you’ll have the cash to buy the ride you really want.
My friend Susan asked me to help her look for a car. She is a very bright person, but doesn't know a lot about cars. But, she is the type that will go to the library and check out a book when she doesn't know about a topic. She figured out how much she wanted to spend (in cash). After reading a lot of back issues of Consumer Reports, she decided to look at the Chevy/Geo PRIZM, as it is basically a Toyota Corolla (built on the same assembly line at the NUUMI plant in Fremont California) - but often sells for much less than the Toyota version, due to the relative reputations of the two marques (smart girl, that Susan!).
We looked at about 5-7 Geo PRIZMS (all about the same model year), on used car lots, dealer lots, and from individuals. One individual had a car that was dirty, had stains on the seats, a couple of dents, lots of scratches, and the ABS light on ("You can fix that" he offered helpfully). Surprisingly, it was the highest priced car of the bunch (and he would not budge on price). Classic "dreamer". We took a pass.
She finally settled on a car from an individual owner that was immaculate in and out, even the engine. No dents or scratches. The owner had most of the service records, and had recently changed the timing belt, battery and brakes. Having looked at several of these cars, she quickly recognized that this car was a pretty good deal (which would have been hard to tell, if it was the only one we looked at). She had her mechanic check it over, and he gave it a clean bill of health.
She paid $3000 for that car, drove it for 3 years, and sold it for $1500 when she left the country. Not such a bad cost per mile in terms of depreciation. The only repair she had to make was for an alternator ($400).
As I noted above, you end up saving a lot of money when you buy a used car, and insurance is one area you can really clean up. For many young people, the dream of owning a shiny new econobox is too temping, and they just have to have one. They end up paying more in insurance premiums than in car payments – a high price to pay for vanity.
While it is a good idea to insure assets, over-insuring an asset is a foolish waste of capital. You can afford to pay a $500 or even $1000 deductible should your car be destroyed. Remember, these are events you are hoping DON’T happen – not things you plan for. Going to a higher deductible can cut the cost of insurance in half. Insurance fraud is a big business, and many of those petty claims for nickel and dime stuff really add up. Moreover, going to a higher deductible tells the insurance company that you are less inclined to file a fraudulent claim.
"But wait" you say, "what if I wreck my car? Then I'm out $10,000!" Yes, that would be true, but if you are a risk-taker you are more likely to reap rewards. Insuring something as trivial as your car's bodywork is overkill, and let me explain why.
The average person gets into an accident every 11 years. And this is something that you have some control over, too. It is not a total matter of random probability. If you slow down, drive carefully, and drive defensively, you improve the odds you will not be in an accident. So rather than pay a lot of money for insurance, a better plan, with better odds, is to drive more carefully.
Insuring a new car is worthwhile, and often mandatory. But collision insurance for an older car - even on in perfect shape, is often a bad bargain.